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S. Korea’s Ticking Debt Bomb

S. Korea’s Ticking Debt Bomb S. Korea’s Ticking Debt Bomb

The woes of South Korea’s household debt have been raised so frequently that people seem to be fed up with this boiling issue. But given China’s possible hard landing and America’s imminent rate hike, there is no question that there should be urgent and viable action taken to curb it.

In July, the government unveiled a comprehensive set of measures aimed at mitigating risks from the growing burden. But such measures were not sufficient enough to defuse the ticking debt bomb.

So the Bank for International Settlements’ recent report on household debt around the world should come as a wake-up call for the government, NewsNow reported.

The report shows that the ratio of South Korea’s household debt to gross domestic product was the highest among key emerging economies last year. South Korea’s ratio reached 84%, far higher than the average of 30% for 14 emerging economies. The figure was also higher than the average of 73% for 26 developed countries.

  Variety of Reasons

More worrisome is the speed of debt growth among households. South Korea’s household debt-to-GDP ratio stood at 72% in late 2007, before the global financial crisis erupted, falling short of the average of 80% among industrialized countries. In the ensuing seven years, South Korea’s ratio surged by 12 percentage points, whereas the developed economies saw their average ratio decline by 7 points.

All this stems from the fact that South Korean households have borrowed more for a variety of reasons while their counterparts in the developed world have been tightening their belts to cut down on liabilities. Most importantly, debt rose at a faster pace than income.

South Korea’s household debt surged from 677 trillion won ($575.45 billion) in March 2008 to 1.13 quadrillion won in June this year, an annual average increase of 7%, which surpassed the nominal annual growth rate of 4 to 5%.

More recently, the central bank’s string of interest rate cuts, coupled with the government’s easing of mortgage restrictions, pushed the debt up to a more dangerous level.

  Another Crisis

Caution against rising household debt is nothing new, but it’s true the Federal Reserve’s decision to raise its policy rate could amplify fears about another economic crisis. The Bank of Korea will, of course, find it difficult to follow in the footsteps of the Fed to raise its key rate soon, especially considering that the South Korean economy is fraught with sluggish exports and depressed domestic demand.

However, it will be inevitable for the central bank to turn to a rate hike to stem the rapid outflow of capital to be caused by the widening gap in interest rates. This could be nightmarish, particularly for low-income families that have had greater debt exposure just trying to get by.

The key to addressing the debt plight is revitalizing the anemic economy, which will automatically lead to job creation and income growth. But if the past is any guide, this won’t be easy.

It might be long past the time for the government to make bold moves to regulate the total amount of household debt and control the pace of debt growth. If not, one cannot rule out the possibility of new economic turmoil.

Financialtribune.com