No quick fix for household debts

The Bank of Korea on Nov. 30 will hold its last monetary policy meeting of the year. It is highly expected that the bank will lift the policy rate off from the record low of 1.25 percent kept since June of last year. The action would be a preemptive measure against an expected hike of another 25 basis points by the U.S. Federal Fund in its December meeting that would place the U.S. rates above the Korean base rate if the BOK does not raise it. The central bank fears a foreign capital exodus if Korea delivers lower yields than the United States.

Goldman Sachs predicted that the U.S. economy was heading into strong momentum that could bump up wages and inflation and generate as many as four Fed rate hikes next year. The U.S. unemployment rate, which has fallen to 4.1 percent, is estimated to drop to 3.7 percent next year and 3.5 percent in 2019. Sooner or later, U.S. rates could reach the Fed’s long-run “normal” range of 3.0 percent.

The fear on our side is the impact on the colossal load of Korean household debt. According to the Bank of Korea, of 1,313 trillion won ($1.2 trillion) worth of household debt as of the end of June, 52 percent was owed to the non-banking sector. The amount — 686 trillion won — is the highest since the fourth quarter of 2002. The financial strain on debt-holders would become heavier as non-banking lenders levy much higher rates. The government has been trying to rein in an increase in household debt through tighter regulations on banks, but that only worsened the situation as lenders turned to higher-interest loans.

Household debt topped 1,400 trillion won in September. But there is no immediate or effective solution. The only way is to increase jobs and income for households to make debtors afford higher interest burden.

JoongAng Ilbo, Nov. 20, Page 34