The ticking time bomb

Korea’s household debt has set new records in its total amount and the speed of its growth. According to the Bank of Korea, our household debt for the third quarter hit 1,060.3 trillion won ($954.4 billion), a whopping 22 trillion (2.1 percent) won surge over the past three months. The increase for a single quarter is the most rapid since the central bank began to provide household debt statistics in 2002. The alarming increase mostly stemmed from the BOK’s lowering of the benchmark interest rate and the largest expansion of mortgage loans in seven years after the government eased restrictions on the loan-to-value (LTV) ratio and the debt-to-income (DTI) ratio for borrowers. Given seasonal factors, household debt will probably increase at an even faster pace in the future.

The level of our household debt rings alarm bells. The ratio of household debt to disposable income stood at 160.7 percent as of the end of 2013, much higher than that of the United States (115.1 percent) and the Organization for Economic Cooperation and Development average (135.7 percent). In other words, Korean families are more likely to go bankrupt than their counterparts in advanced nations. That’s why global financial companies dub our economy a “time bomb” waiting to go off.

According to the OECD, Korea’s household debt has increased 8.7 percent annually from 2008 to 2013, while the United States and Japan managed to reduce the size of their household debt. Another problem is that most of our household debt is actually related to people’s livelihoods, as people with low credit ratings - mostly mom-and-pop businesses in the lower 20 percent income bracket - account for 20 percent of the entire household debt. They can hardly pay back their interest.

The government thinks it can resolve the issue through income growth from economic revitalization. But what if that only leads to more household debt? And even if our economy really grows, peoples’ household debt could increase faster than their household incomes. The only solution is lowering the speed of household debt growth.

The government has tried to downplay the danger of rapidly increasing mortgages over the last three months. “That means the quality of our household debt is better because people now borrow from monetary institutions rather than from non-monetary ones,” it said. But the government must prepare for an emergency. It should consider toughening conditions for loans and writing off poor peoples’ debts. It must not forget the lessons from the 1997 financial crisis and the 2008 global financial meltdown.

JoongAng Ilbo, Nov. 26, Page 34