Addressing household debt
The Bank of Korea’s second report of the year on Tuesday about the nation’s financial stability rings alarm bells on the household debt front. The central bank gave stable ratings to our foreign exchange and financial markets thanks to the sound management of financial companies, including banks. Meanwhile, the financial solvency of the corporate and household sectors has precipitously declined. In other words, there’s no concern over the possibility of an economic crisis just like the 1997 foreign exchange crisis - thanks to the stable functioning of the financial market despite hardships facing businesses and households.
Our lawmakers must read between the lines of the report. Actually, the report stresses the need for the government to approach the situation very carefully, as families cannot afford to spend money due to debt traps, and companies cannot sell their products well. If household purchasing power falls, the economy will shrink fast.
Such gloom is evidence that our economy is still stuck in serious internal trouble. The outgoing finance minister drastically lifted existing regulations on mortgage loans in a bid to ease the excessive depression in housing market. As a result, short-term household debt surged to nearly 1,200 trillion won ($1.03 trillion), which accounts for 164.2 percent of their disposable incomes - a 19.9 percentage point increase compared to the end of 2008. That’s an unavoidable offshoot of the government’s stimuli policy based on household debt.
People who bought houses beyond their ability to pay back - thanks to eased regulations - are increasingly worried about the government’s potential rate hike after the Fed’s decision last week. To make matters worse, the report warns that Korea’s rapidly aging population will lower the ability of people in their 50s and 60s to repay debt.
Warning signs also come from Statistics Korea’s survey of the status of household finance and welfare. Each household on average has a 61.8 million won in debt, with those in their 50s having the biggest share. As the population ages, people tighten their belts, as happened during Japan’s lost 20 years. We hope our next finance minister averts the looming economic crisis.
The government must sort out zombie enterprises and foster new growth engines for our economy through deregulations. It also must slow the fast pace of increasing household debt by speeding up the switch of variable interest rates to fixed rates and create new jobs for retirees to support their incomes.
JoongAng Ilbo, Dec. 23, Page 34