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(EDITORIAL from Korea Times on Nov. 17)

Editorials from Korean dailies 07:03 November 17, 2021

Defuse debt bomb
Alarm bell rings over surging household loans

Soaring household debt in South Korea has already become a ticking financial bomb that could lead to an economic implosion unless bold action is taken immediately. A recent report by the Institute of International Finance (IIF) tells us how serious a situation the country is in now as far as the debt issue is concerned.

According to the report, the country's household debt totaled 1,805.9 trillion won ($1.53 trillion) in June which accounted for 104.2 percent of gross domestic product (GDP). This ratio is the highest among 37 economies. Hong Kong came second with 92 percent, followed by Britain (89.4 percent), the U.S. (79.2 percent), Thailand (77.5 percent), Malaysia (73.4 percent) and Japan (63.9 percent).

South Korea is the only economy whose household debt has exceeded GDP. The country also recorded the steepest debt growth rate of 6 percentage points from a year earlier, followed by Hong Kong with 5.9 percentage points, Thailand with 4.8 percentage points, and Russia with 2.9 percentage points.

As the IIF pointed out, runaway housing prices have contributed to the upsurge in household debt. More and more people have rushed to buy homes amid low interest rates and the short supply of new apartments. The situation has deteriorated particularly since the spread of COVID-19 in 2020.

The Bank of Korea cut its key interest rate to a historic low of 0.5 percent in May 2020 to help the country ride out the devastating economic impact of the pandemic. But monetary easing together with fiscal expansion has formed asset bubbles in the property, stock, and cryptocurrency markets.

Our editorial board has repeatedly warned of the looming dangers of skyrocketing household debt, particularly since the debt surpassed 1,500 trillion won in 2018. However, the government, the central bank, and the financial regulators have done little to address the problem. The BOK raised its benchmark interest rate by 0.25 percentage points belatedly last August, but such a one-time rate hike is insufficient to cool the overheated real estate market and reduce household loans.

The authorities cannot curtail household debt without stabilizing home prices because a large proportion of the debt is in the form of mortgages. The Moon Jae-in administration cannot deflect criticism for failing to bring property speculation under control. The financial regulators have just begun, also belatedly, to put restrictions on the provision of bank loans to individuals.

Now, no one can downplay the growing risks of household debt. The debt bomb will explode when asset bubbles burst, and this could lead to a financial and economic crisis. That's why it is urgent to mobilize all possible means to avert such a catastrophe. The authorities should absorb excess liquidity and remove bubbles on a step-by-step basis for a soft landing. More interest hikes are crucial to check the rise of household loans. This winding-down process will be painful, but we have to bite the bullet to ensure a stable economic recovery and sustainable growth.

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