Higher borrowing costs demand reforms that lift productivity, strengthen finances
Cheap money has enjoyed a remarkably long run. Its retirement is now harder to deny, forcing South Korea to rethink policies built around the assumption that capital will remain cheap.
This week, the 10-year US Treasury yield broke above 5 percent while the Federal Reserve raised its benchmark rate by 25 basis points to 3.75 to 4 percent, its first increase since July 2023.
For more than two decades, cheap capital, energy and labor helped economies absorb inefficiencies that otherwise would have been costly. As that cushion shrinks, the nation should stop building policy around the expectation that rates will soon return to their old lows.
Long-term yields are being shaped by more than near-term inflation. Oil above $100 a barrel is adding to price pressures as conflict persists in the Middle East. The vast sums being poured into artificial intelligence infrastructure are also competing for global savings.
US fiscal policy is another strain. Gross public debt has climbed above 110 percent of gross domestic product, and investors are demanding a larger premium to hold long-dated government bonds. The special advantage once enjoyed by Treasurys as exceptionally liquid and safe assets has also weakened.
There is a tempting shortcut. Governments can issue more short-term debt to avoid locking in today's elevated long-term yields. But that merely brings the problem closer. With more debt maturing sooner, refinancing becomes costlier if rates stay high.
A changing investor base, with more price-sensitive and leveraged participants in bond markets, can make benchmark yields more volatile.
Korea is already feeling the shock. The 10-year Treasury bond yield has risen above 4.6 percent, reaching its highest level since October 2022. Higher government bond yields eventually feed into corporate borrowing costs and bank lending rates, squeezing businesses and households.
The Bank of Korea has also tightened, raising its policy rate to 3 percent over two consecutive meetings in July and August. It was the first back-to-back tightening since January 2023, when the BOK completed a rate-hike cycle that began in April 2022. The gap with the Fed has widened to as much as 1 percentage point, with a weaker won and heavy household leverage adding to the strain.
Yet simply matching every Fed move would be poor monetary policy. The BOK should set clear conditions for further increases and weigh their timing against domestic inflation, exchange rates and credit conditions.
Household credit has already exceeded 2,000 trillion won ($1.45 trillion), and corporate debt is nearing that scale. Higher interest expenses will weigh most heavily on borrowers with little room to absorb them. Financial support should therefore be selective. Extending loans indefinitely can conceal losses rather than resolve them.
Fiscal policy faces its own burden. Large-scale government borrowing can put further upward pressure on market rates, and interest payments consume more of the budget. Korea should trim nonessential spending to preserve primary fiscal stability.
When capital is expensive, competitiveness depends on the output generated by each unit of investment. That calls for regulatory reform to lower barriers to market entry, give labor markets greater flexibility and strengthen incentives for productivity.
Rates may eventually fall, but nobody knows when. The country should prepare for capital to remain expensive long enough to expose overextended finances and unproductive investment.
Cheap money once allowed policymakers to postpone hard decisions. That era is receding. Korea no longer has the luxury of tolerating low productivity, reckless leverage or misdirected capital. The task now is to make every unit of capital yield measurable return before higher borrowing costs turn into a permanent drag on growth.
khnews@heraldcorp.com
