'Partial write-off is answer to household debt problem'

By Choi Sung-jin

Few economists, here or abroad, dispute that Korea’s household debt of nearly 1,200 trillion won ($1,000 billion) is a big time bomb threatening the nation’s economy. And its fuse will be smoldering faster than ever this year when the sluggish economy and stagnant income combine with rising interest rates to drive numerous debtors into defaults and bankruptcies.

Yet even the experts, while largely agreeing on the seriousness of the situation, differ somewhat on how bad the problem is, and show even wider difference on how to defuse it.

In a roundtable talk organized by the Hankyoreh newspaper, Professor Park Chang-kyun of Chung Ang University strongly rejected government officials’ assertions that household debt still remains within controllable levels. “Debt management is possible only when debt grows more slowly than income, but that has never been the case for the past couple of decades,” he said.

For instance, Prof. Park noted that if household debt increases 5 percent a year and the nation’s current growth rate – the real growth rate plus inflation – amounts to 7 percent for the next 20 years or so, then there will few problems, but that is hardly likely. In reality, the growth rate was 5 percent last year but household debt increased 10.4 percent in just the first nine months.

As a result, the Korean household debt rate against disposable income surged to 169.8 percent last year, up 5.6 percentage points from 2014, and nearly 40 percentage points higher than the average of 130.5 percent for 23 OECD nations as of Dec. 31, 2014.

“If the economy slows down further under these circumstances, indebted low-income families, self-employed and highly leveraged home purchasers will crumble, taking along creditor banks with them and leading to overall system failure,” Park said, stressing the need for the government to work out contingency plans to prepare for such a situation.

Lim Jin, a researcher at the Korea Institute of Finance, played down the possibility of any immediate crisis, though, barring the plunge of property prices this year or next.

Professor Chun Sung-in of Hongik University called for a shift in perspective on the household debt issue, from a creditor-oriented to a debtor-oriented viewpoint. “The present approach that focuses on the financial health of creditor banks or overall economic stability is wrong itself,” he said. “The seriousness of this issue forces us to find out what are the most vulnerable sectors (to defaults), and how to lessen burdens on low-income, low-credit and multiple debtors.”

As of last June, the number of credit delinquents – people who failed to repay interest and principal for three months or more – reached 1.05 million, with their combined debt of 130 trillion won. Up to 3.44 million debtors have also borrowed from three financial institutions or more.

Prof. Chun advised the government to write off part of the debt for the most vulnerable debtors in ways to minimize controversy over how to select those to save or let sink. “Allowing them to shake off the labels of credit delinquents and resume economic activities will help the overall economy,” he said.

“Financial service firms that lent money without thoroughly confirming their ability to repay should also be held accountable,” said Chun, when asked about controversy over moral laxity. “The government injects huge amounts of taxpayers’ money into corporate restructuring. Then why can’t it do the same for the partial restructuring of individuals’ debts?”