[ED] Soaring debt risk - The Korea Times

Authorities need to prepare exit strategy

All economic players ― households, businesses and government ― have recorded a surge in their debt due to the COVID-19 pandemic. This is raising the need for an exit strategy to avoid a debt crisis before it is too late.

According to the Bank of Korea (BOK), outstanding bank loans extended to households reached 988.8 trillion won ($896 billion) as of Dec. 31, up 100 trillion won from the previous year. When loans from non-bank financial firms were included, the sum hit a record 1,682 trillion won last September, and is estimated to grow further to 1,700 trillion won by the end of 2020 when figures are in. Household debt has already emerged as a ticking time bomb.

Corporations are in a similar situation. Their outstanding bank loans stood at 976.4 trillion won as of Dec. 31, up 107 trillion won from a year earlier. Small- and medium-sized enterprises in particular had to borrow more last year to tackle the fallout from the unprecedented public health crisis. Microbusiness operators and the self-employed ― most vulnerable to the COVID-19 shock ― were driven into debt.

It was inevitable for individuals and corporations to rely more on debt to cope with the pandemic. The government also had to take up policies for fiscal expansion to provide emergency relief funds to both households and businesses. For this, the Moon Jae-in administration drew up four supplementary budgets totaling 66.8 trillion won last year in addition to the annual state budget of 512 trillion won. This year's budget increased to 558 trillion won with 93 trillion won to be financed by issuing treasury bonds.

State debt totaled 846.9 trillion won last year, up 123.7 trillion won from 2019. It is expected to rise further to 965 trillion won this year, hurting the nation's fiscal health. The ratio of state debt to the country's GDP is predicted to surge to 47.3 percent in 2021 from 43.9 percent in 2020 and 37.4 percent in 2019. It is likely to soar to as high as 60 percent by 2024.

The big problem is that the snowballing debt, coupled with fiscal expansion and monetary easing, has formed an economic bubble. Well before the COVID-19 outbreak, abundant liquidity was flowing into the property market, causing housing speculation. The government took 24 sets of anti-speculation measures over the past three years, but failed to check soaring housing prices. The stock market has also become overheated with the benchmark KOSPI surging to the 3,000-point level this month.

It is worrisome that individuals are engaging in panic buying of homes and stocks with borrowed money. This leveraged investment is not sustainable as it is only creating asset bubbles. That's why BOK Governor Lee Ju-yeol warned against risks of high indebtedness Friday, while leaving the central bank's policy rate unchanged at a record low of 0.5 percent. He said the speed of the recent stock rally was too quick.

However, it is disappointing that the BOK chief has not come up with any steps except the verbal warning. No one knows better than Lee that pre-emptive action is needed to prevent the sudden burst of a bubble. Housing and stock speculation is the direct results of near-zero interest rates and excessive liquidity. Now is the time for the financial authorities to prepare timely and appropriate measures to decrease debt and regain the country's fiscal health.