Household debt continues to spiral

Concerns that the ever-growing levels of household debt will weigh down the real economy found new fuel for thought when the Bank of Korea released a report yesterday showing the debt-to-asset ratio is at its worst point since the global financial crisis in 2008.

According to the central bank, while financial assets grew 5 percent on-year, debt grew 8.5 percent. Assets of households and nonprofit organizations amounted to 2,303.4 trillion won ($2.04 trillion) at the end of 2011, whereas the combined debt reached 1,103.5 trillion won.

The size of the financial assets is now just two times the level of debt. This is the smallest difference since assets were 1.96-fold the level of debt in the fall of 2008.

According to Morgan Stanley yesterday, Korea’s debt to gross domestic product is currently the highest among emerging markets in Asia.

Morgan Stanley noted that Korea’s debt to GDP as of 2010 was 72.2 percent. This is higher than the 67 percent posted in Singapore, 52.6 percent in Taiwan and 24.4 percent in China.

In particular, debt in nonbanking institutions has grown considerably.

While household debts at banks last year grew 5.7 percent, lending from nonbanking institutions shot up nearly 10 percent.

BNP Paribas reported that Korea’s household debt has grown exceptionally after the government loosened financial regulations in response to the financial crisis of the late 1990s. It added that a major factor in the rise of debt has been Korea’s unique mortgage-loan system, in which interest payments are paid during an extensive period and the long-term jeonse deposits are utilized.

But lessening the debt burden through household austerity could cool the economy’s already shrinking spending market.

Consumers have been cutting back on spending, burdened by high inflationary pressure.

The Morgan Stanley report noted that recent government pressure on nonbanking institutions to cut back on household lending will likely slow the recovery of spending in the private sector.

Additionally, as debt continues to grow, the purchasing power of those in the lower-income classes will fall.

In fact, a Samsung Economic Research Institute report said that Korea was the only country among economies that posted positive growth in the fourth quarter to also see a drop in private spending.

The economic institution said if staggering consumer spending continues for an extensive period, the nation’s economic growth would be crippled.

“Securing active consumer spending is vital by improving the soundness of households’ fiscal situations, which could be achieved through restraining excessive expansion of debt while cutting down on existing loans,” said an analyst at SERI.

By Lee Ho-jeong [ojlee82@joongang.co.kr]