Korea's household debt problem

Local financial authorities and global banks like Morgan Stanley have pointed to growing household debt in South Korea as one of the biggest risks to the local economy.
Kim Hyesung explains why it's such a big problem and the measures being rolled out to drive down debt.

Korea's household debt has doubled since 2008, topping 1-point-3-4 trillion U.S. dollars as of the third quarter of last year.
That's about the size of the country's GDP.
The Bank of Korea says, between 2008 and 2016, household debt -- minus income growth -- grew at 3-point-1 percent a year,... eight times faster than the average of OECD countries.
According to the Bank of International Settlements, Korea's household debt increased the second fastest in the world in the second quarter of 2018...trailing just behind China.
This ballooning debt is attributed to slower economic growth, low interest rates that encourage borrowing, and Korea's deregulation of the housing market, which took effect in 2014, triggering a nationwide buying spree.

"If people can borrow money, use it for their businesses, make a profit and pay it back, that's not in itself a problem. But debt has outstripped the growth in household income of around 4 to 5 percent And debt borrowed by lower-income people can cause instability in the financial system when they're unable to pay it back."

Figures differ, but one by the central bank shows lower-income people -- those in the bottom 30 percent -- borrowed more than 76 billion U.S. dollars.
More than one-point-five million people took out loans from three or more financial institutions.

"The 2008 global financial crisis was sparked in the U.S. by a sharp increase in high-risk mortgages that went into default. Korea's household debt is not as bad as that. But if triggered by some economic shock and people can't pay what they owe, this debt could potentially drive down consumption and cause banks to rapidly become insolvent."

The government's housing regulations, including a tax rise that went into effect last September, and the BOK's rate hike, has helped slow down borrowing
But slowdown in domestic and global economic growth will make it difficult to reduce the debt.
Experts say, it's more important than ever to rein in the debt increase, improve banks' fiscal soundness, and come up with supportive measures like longer maturities... to help low-income people especially... pay back their loans.
Kim Hyesung, Arirang News.