Shin Hyun-song Princeton University professor

By Kim Tong-hyung

Princeton University economist Shin Hyun-song downplayed concerns Thursday that Korea’s historically high level of household debt has compromised its mettle to withstand worsening global conditions.

Talking to reporters at the Bank of Korea (BOK), Shin also expressed confidence that the country’s capital control and macro-prudential policies are working as prescribed. The Korean banking system has already experienced substantial deleveraging following the collapse of Lehman Brothers in 2008 and it’s unlikely that the country will be rocked as hard now as it did back then, he said.

``If the pullback in liquidity has any silver lining, it will be the lowering of raw material prices, resulting in the easing of inflationary pressures. Another positive is that the growth of the household debt mountain is expected to slow because it was a result of excessive money supplies, although the subduing of the real economy is certainly a concern,’’ Shin said.

``Obviously, it would be ideal that household debt stabilizes at a lower level than it is now. The government is well positioned to implement the required policies and it could be said that the external conditions are rather favorable when limiting the discussions to reducing debt.

``In the 2008 crisis, we were like a mountain full of dry leaves that somebody dropped a fire on. But there isn’t much left to burn now after what we went through in the previous crisis. Korea has been able to introduce a number of effective macro-prudential policies and its foreign currency management is a lot more stable.’’

BOK puts the household debt mountain at 912.9 trillion won ($787 billion) based on data from savings institutions and other financial companies. When combing the borrowing from self-employed people, the total grows to over 1.1 quadrillion won, compared to the 1.2 quadrillion won the economy made last year.

Shin said that developed economies could do much worse than take a page out of the playbook of developing economies like Korea, which has successfully implemented effective strategies to curb speculative money flow and prevent capital flight.