ed Ticking time bomb

Korea teetered on the brink of bankruptcy during the Asian financial crisis 14 years ago due to the heavy debt exposure of family-run conglomerates known as chaebol.

Now the fourth-largest Asian economy may be facing another economic crisis, this time because of bloated household debt.

According to the Bank of Korea, the nation’s household debt turned around in the second quarter after a brief decline in the first quarter. Household credit, the sum of loans and credit purchases, climbed by 10.9 trillion won to hit a record 922 trillion won in the three months ending June 30 from the previous quarter.

Second quarter growth can be compared to the 800 billion won drop in the January-March period, when household lending declined for the first time in three years. Nevertheless, it was a relief that the growth pace of household debt slowed with the year-on-year gain dwindling to 5.6 percent in the April-June quarter, compared with 8.8 percent in the third quarter of last year, 8.1 percent in the fourth and 7 percent in the first quarter of this year.

Household loans by banks and non-bank depositary institutions amounted to 646 trillion won at the end of June, up 8.7 trillion won from three months earlier. The quarterly rise marked the largest expansion since the fourth quarter of last year.

With household lending showing little sign of contracting, questions are being raised against the effectiveness of the government’s string of measures aimed to achieve a ``soft-landing.’’ Last year, the government unveiled a package highlighting the expansion of financial aid for the working class, but the most salient feature of the latest household debt problem is the prolonged slump of the property market. That is, an upsurge in the number of the so-called ``house poor’’ has become a genuine problem.

The household debt problem snowballs as households take out loans backed by the value of their homes, which causes housing prices to drop. During this process, borrowers default en masse and banks are unable to retrieve the debt.

To be sure, Korea’s debt level is high enough to alarm policymakers. The mountain of household debt is now 89 percent of our gross domestic product (GDP), much higher than the OECD (Organization for Economic Cooperation and Development) average of 77 percent.

Most worrisome is that the Korean economy is slipping into a deep downturn ― this year’s GDP growth is certain to fall below 3 percent. If low growth continues in the years to come, the real estate market will remain in the doldrums and job creation will become harder. This will make it difficult for borrowers to earn more and pay back loans.

Against this grim backdrop, the government is doing little to address the debt problem fundamentally. What is needed now is for the government to force banks to reduce borrowers’ principal and interest burdens.