The Korea Herald

지나쌤

[Editorial] Curbing household debt

Administration to announce plan this month

By Korea Herald

Published : Jan. 12, 2014 - 19:38

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Household debt has been growing at an alarming rate for the past decade. But the previous administrations have turned a deaf ear on warnings that the snowballing debt would push the nation into another financial crisis if no action is taken against it.

Now with the household debt assumed to have surpassed the mind-boggling 1 quadrillion won ($942 billion) mark, the Park Geun-hye administration is reportedly working on a plan to curb its growth. Surely, it’s better late than never. But the question is whether the measures to be taken will be strong enough to put the brakes on the debt and keep the nation from plunging into a household-debt-led calamity.

The debt was at 494.2 trillion won at the end of 2004. It has since more than doubled, with the Bank of Korea estimating that it exceeded the 1 quadrillion won level last November.

The sheer size of it is undoubtedly posing a threat to the nation’s economic health. But no less threatening is the pace of its growth, which is faster than that of the disposable income. As a result, the ratio of household debt to disposable household income soared to 169.2 percent in September, the worst ever.

The central bank warned in October that if the household debt continued to increase faster than the household income, it would be a potential threat to the nation’s macroeconomic management. Now it demands that the debt be kept from growing faster than the nation’s gross domestic product.

Another threat comes from an anticipated increase in interest rates, with the United States preparing to phase out its quantitative easing. Most vulnerable are households in low income brackets, including those headed by temp workers and persons aged 60 or older. According to a recent survey, the year-on-year debt increase rate was at 12.3 percent for households headed by persons aged 60 or older, almost twice the average rate of the total households, in 2013.

Now on the drawing board are tightened regulations on lending to households renting homes and applying for secured loans from nonbanking financial institutions. The administration is also planning to replace short-term loans with variable rates that are rolled over with long-term loans with fixed rates.

According to news reports, Housing Financing Corp. will stop providing a debt guarantee for households that rent a home for 600 million won in key money and lower its coverage, for instance, from 90 percent of the key money to 80 percent when its amount ranges from 300 million won to 400 million won. The administration is also reported to be considering demanding that nonbanking financial institutions start applying loan-to-value ratios on collateral-secured loans.

These measures will undoubtedly help curb an increase in the household debt. But they will not be enough. Critics are already saying they will be little better than a band-aid treatment.

The Park administration will have to take bolder steps, such as debt adjustment, if it wishes to keep the household debt at a manageable level. At the same time, it will have to remind itself that an ultimate solution lies in boosting employment to increase household incomes.