ED Swelling household debt

Prepare steps to prevent ticking time bomb from exploding

Korea's household debt reached a record high of 1,726 trillion won ($1.55 trillion) as of the end of last year, according to data released by the Bank of Korea. Household debt refers to purchases on credit and loans extended by financial institutions, including commercial lenders and mutual savings banks, to the people in a household. No less worrisome than the largest-ever amount of household debt is its rapid pace of growth.

Household debt increased by 125.8 trillion won last year, the steepest gain since 2016. It grew by 44.2 trillion won in the third quarter, followed by an increase of 44.9 trillion won in the fourth, indicating the tempo of debt growth did not slacken at all despite the government's efforts. The swelling debt is due to the explosive demand for mortgages. Because of the government's failed housing policy, many Koreans, including the younger generations, went all-out to buy homes with borrowed money. Loan demand to buy stocks also rose toward the year-end, reflecting the global investment boom in equity markets.

Unfortunately for these homebuyers and stock investors, however, there are signs that the low-interest era might be coming to a close. In the U.S., the interest on the 10-year Treasury note soared to 1.37 percent Tuesday, the highest since February last year. On Monday, the interest rate on Korea's 10-year treasury bonds also soared to 1.92 percent, hitting a 22-month high. Wall Street reportedly is embracing the bond rate hikes as a given, forecasting a continuous upturn.

If the interest rate goes up, it will inevitably lead to added financial pressure on households, as more than 70 percent of their debt is in the form of floating-rate loans. The moment these households fail to cope with rising interest payments, the “debt bomb” will explode, leading to bank failures and economic turmoil. Suppose the government forces lenders to extend debt maturity under the pretext of supporting households hit by the COVID-19 pandemic. Under this scenario, it will likely end up aggravating insolvencies. This is the time for the financial authorities to work out a soft-landing plan for households in debt by selecting aid recipients far more strictly than before.