South Koreans can vividly remember that they had to bite the bullet during the 1997-98 Asian financial crisis. Many of them lost jobs and suffered from drastic corporate and financial restructuring. Then they popped the bottle of champagne too early, emerging from the turmoil in less than two years. They spent more than what they earned, leading to a credit card crisis in 2003 that made over 4 million people credit defaulters.
Now, concerns are growing that the nation may take a similar path on the heels of the 2008 global crisis. According to the Bank of Korea (BOK), the country’s total household debt amounted to 801.4 trillion won ($738.2 billion) at the end of March. The sum accounted for 86 percent of gross domestic product (GDP), much higher than the average 77 percent for member states of the Organization for Economic Cooperation and Development (OECD).
Ostensibly, the figures look stable without posing any immediate threat to the financial system and the economy. However, household debt could increase to as much as 950 trillion won when it includes obligations of the self-employed. The ratio of the debt over disposable income surged to 155 percent this year from the 92 percent in 2001. The percentage is far higher than 122 percent in the United States.
More serious is that household debt has increased at an annual average rate of 12.7 percent over the past 10 years, nearly twice the GDP growth rate. This means that individuals have borrowed too heavily out of proportion to their income growth. In a word, the debt problem can be compared to a ticking time bomb that may explode anytime soon if the economic situation deteriorates.
A prolonged slump in the property market is feared to add fuel to the fire. More than half of the household debt is mortgage loans. Thus, a further fall in home and apartment prices might depreciate the value of collateral, heightening the risks of defaults. An interest rate hike is another destabilizing factor as borrowers’ debt service burden will inevitably get higher.
More than anyone else, borrowers are responsible for their over-indebtedness. Their overspending, greed for money and speculative purchase of apartments are the underlying cause of the problem. Policymakers and bankers are equally blamed for recklessly extending loans to individuals without taking into account borrowers’ repayment capacity. The central bank has kept interest rates too low for too long, making it easier for individuals to borrow at a lower cost.
The government plans to disclose a package of measures to curb the debt growth and prevent a potential default crisis late this month. Policymakers should mobilize all possible means to defuse the ticking bomb before it’s too late. Individuals also must learn how to live within their means.