The wheels are coming off
The author is an editorial writer of the JoongAng Ilbo.
An economic crisis is deplorable because it is most cruel to the poor and weak. The hardships of the Asian financial crisis of 20 years ago and the global financial meltdown 10 years ago remain vivid in our memories. Livelihoods have become equally tough these days. A wide range of data underscores that our economy is in as serious a state as during those past two crises.
Some data may come as a surprise.
One such is a jump in cancellations of insurance policies. Payouts by life insurers to customers cancelling their policies reached 12.9 trillion won ($11.5 billion) between January and June, up 21 percent on year. At this rate, the figure could hit an all-time high by the end of the year.
Insurance is a last resort for ordinary people. It is the minimum coverage for their future. Their losses are big when insurance policies are terminated before they mature. This is why most customers are advised to hold onto their insurance policies until their maturity. Still, many can no longer afford saving for the future and must cash out to survive day by day. When the country sought an international bailout in the late 1990s, nearly four out of 10 families withdrew bank savings or retired insurance policies.
Loans backed by insurance claims are also on a surge. Money can be lent out by life insurers backed by the payments already made by the subscribers at an interest rate between 7 to 10 percent, more than doubling the usual bank loan rates. Such loans increased nearly 9 percent on year to top 60 trillion won in the first half.
Loans serviced by credit cards, which charge interest rates of 14 to 15 percent, have also accelerated. Loans by seven credit card issuers jumped by 17 percent on year to nearly 21 trillion won. That means more consumers are resorting to expensive credit card borrowing because they have been turned down by banks.
Insurance policy cancellations and higher-interest personal loan increases are common signs of an economy in depression. They are the canaries in the coal mine — or a clear warning sign of a looming recession. They are clear signs that the Korean economy has entered a slump. Unsurprisingly, the delinquency rate on loans for small and mid-sized companies and the self-employed has shot up.
The increase in risky loans can lead to greater woes for the borrowers. People do not become credit-delinquent and homeless overnight. Loans surely can be paid back even if interest rates are high when business and income is steady. But that is not the condition of tough times. When a due date arrives, the borrower inevitably has to turn to loan sharks and can end up delinquent and bankrupt.
The job crisis is behind the surge in pricey loans. People do not have to turn to expensive loans if they receive steady monthly paychecks. Without jobs, lives of debtors become hopeless.
After a July shock, the August data was stupefying with new jobs totalling a mere 3,000 and unemployment fixed at over 1 million. The job market more or less has become dysfunctional, forcing more to live off debt. We witnessed the vicious cycle in the past two crises.
In contrast, job openings in the United States hit a fresh record high. Japan also has nearly full employment. Korea is an exception.
The situation calls for immediate action from President Moon Jae-in. He must acknowledge the crisis. He must look straight at the problems of his income-led growth agenda. This is no time to play a game of chicken with the market. He must sack the people who have wrecked the job market and those who falsely reported on the situation. No stakeholders in a private company tolerate a CEO that causes a bankruptcy.
JoongAng Ilbo, Sept. 13, Page 34