The route to moral hazard

The administration under President Moon Jae-in is considering a bailout of consumer delinquents with low incomes. Moon had promised to have the National Happiness Fund, designed for consumer credit relief, provide funding to cover the costs of subprime loans of 10 million won ($8,966) or lower that have been overdue for 10 years or longer during the campaign. The government plans to go further. It will buy bonds held by subprime lenders with long-term liabilities and write them off. More than 800,000 debtors could be relieved thanks to the program.

All presidential candidates — conservative and liberal — pledged to ease the debt burden of troubled people. It has long been a popular campaign platform. Former President Kim Dae-jung vowed to write off farmer’s debt in his 1987 and 1992 campaigns. Another liberal, President Roh Moo-hyun in 2002 offered to extend creditors-led workout program typically for corporate borrowers to individual debtors.

On the conservative front, President Lee Myung-bak pledged to restore creditability for 7.2 million people during the 2007 race. In the 2012 election, President Park Geun-hye also vowed to create an 18 trillion won fund to write off up to 50 percent of liabilities for general individual debtors and 70 percent for the poorest people.

The latest measure sought by the Financial Services Commission proposes to write off entire debts — instead of a portion — which could create a moral hazard. It aims to give a second chance to long-term debtors and ease the risk to society.

The Happiness Fund initiated a relief program in April for debtors who have been late in their liabilities of less than 10 million won, but so far has received a lukewarm response. The applicants have to undergo lengthy scrutiny to prove that they have no means for repayment. Few hiding themselves from creditors would willingly come out and seek state relief. FSC Chief Choi Jong-ku said that a strict review in debt write-off would not stoke moral hazard.

But the debt write-off could upset those who have been faithfully paying back their debt. About 830,000 have been paying off their delayed debt of less than 10 million won under interest cuts arranged by the Happiness Fund. The bailout could send a wrong message that debt could one day be written off.

After becoming the president, Kim Dae-jung deferred payment and cut interests instead of writing off debt for farmers as he had promised during campaigns. The Moon administration also should realistically adjust his campaign promise to relieve debtors.

JoongAng Ilbo, July 28, Page 30