Fund won’t alter economy fundamentals, professor says

The Park Geun-hye government’s ambitious National Happiness Fund, intended to lower the household debt burden for those with middle and lower incomes, is not a fundamental remedy, said Kim Jung-sik, a Yonsei University professor of economics. The fund will start accepting applicants today.

The debt restructuring scheme is a temporary solution at best, with the potential to further increase household debt, Kim wrote in a paper to be presented today at a forum organized by the Korea Economic Association and the Korea Institute of Finance.

Lowering the interest on loans, reforming the microcredit loan offered to lower-income borrowers, establishing free financial aid for start-ups, restructuring financial companies’ governance structure and enhancing the expertise and independence of outside directors are a few of the issues that will be discussed.

In his paper, Kim says the government debt rescheduling program will likely give a boost to the nation’s economy as reduced financial burdens should result in more consumer spending. At the same time, it could discourage people from repaying their loans with the expectation of government assistance.

The Yonsei University economist added that one way to prevent debt-induced insolvency is to cut interest rates.

“Lowering the interest rate through quantitative easing or monetary policy will reduce high-risk household debt,” Kim wrote. “Although there are concerns that a lower interest rate would only increase the number of new loans, the possibility is low as the nation’s economy is in critical condition.”

Household debt, which includes bank loans and credit cards, was at a record level of 959 trillion won ($856.6 billion) as of end of 2012, a 5.2 percent increase from the previous year. Although total household debt growth has been slowing since its peak 8.8 percent year-on-year expansion in the third quarter of 2011, the continuous growth has been considered a major risk in light of an increase in the number of delinquent debts.

According to the Financial Supervisory Service the debt overdue rate was at its highest level in six years at 1.04 percent in February. This is up 0.05 percentage point from January.

In the second session of the forum, Nam Joo-ha, Sogang University economics professor, plans to discuss financial assistance such as microcredit loans to those with either low income or low credit ratings, while John Junggun Oh, Korea University professor on economics, will address the government financial support for start-ups, which is one of the Park administration’s key policies.

Park Young-seok, Sogang University professor of business administration, will discuss overhauling the governance structure for financial companies. Parks claims that under the current system, the voices of minority and institutional investors are not properly implemented when it comes to business decisions.

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