Korea’s total financial debt 2.6 times GDP

By Kang Seung-woo

Korea’s total debt — at state and private levels — has reached 2.6 times its gross domestic product (GDP) as of the end of June 2011, data showed Monday.

Especially, household debt is growing very fast to pose a big threat to the overall health of the economy.

Total debt includes that of the government as well as public firms, private companies and households.

According to think tanks and brokerages, the total debt reached 3,283 trillion won ($2.93 trillion) as of June 30, up 5.7 percent up from 3,106 trillion won a year ago.

The debt-to-GDP ratio is based on an estimate that Asia’s fourth-largest economy will expand 8 percent year-on-year to reach 1,267 trillion won by the end of the year.

The government debt, which refers to the liabilities of the central and provincial governments, stood at 419 trillion won, up 5.9 percent from 396 trillion won a year earlier, while debts of households and non-profit organizations grew 9.4 percent to 1,050 trillion won, the data noted.

Private companies owed 1,461 trillion won, while state-run firms’ debt reached 353 trillion won from 305 trillion won the previous year.

Kiwoom Securities, a brokerage, said in its recent report that Korea’s size of individual debt has reached an inexcusable level. Debtors’ capacity in repayment is deteriorating amid slow domestic demand.

“Over the past two or three years, household debt has snowballed and it may pose a threat to the nation’s economy,” said a Seoul-based economist.

Meanwhile, problem is expected to increase next year, despite government attempts to contain it.

The government announced in June that it plans to promote fixed interest rates for home-backed loans, which mostly have adjustable rates. It also intends to “encourage” more households to mend the practice of only repaying interest on their mortgages without paying off the principal during a grace period.

Currently, only around 5 percent of home loans are extended this way, but the Financial Services Commission (FSC) aims to boost the figure to 30 percent by 2016.

Financial markets estimate that the government’s push will force banks to retrieve their money and eventually, borrowers are likely to fall to default.

In addition, the steady increase in the lending rates amid high inflation will cripple borrowers’ debt repayment.

According to the banking industry, the average lending rates of household loans, including mortgages, grew from 5.35 percent at the end of last year to 5.86 percent in September 2011.

Given that household debt came to around 627 trillion won in August, household interest payments have increased by 3.2 trillion won per year.