Mounting household debt poses major threat to Korea: former Moody's analyst

Mounting household debt in South Korea is a major risk factor that could undermine financial stability and economic growth of Asia's fourth-largest economy, but the country's fundamental soundness and pre-emptive measures could help resolve such problems, a former Moody's analyst said Tuesday.

"(A U.S. rate hike) will have effects on every economy in the world," Thomas Byrne, president of the New York-based non-profit Korea Society, said in a breakfast meeting in Seoul.

"I'm saying it is a great challenge. I agree with the Bank of Korea. This is a major risk that has to be managed."

Household loans extended by local lenders increased at the fastest clip last month, reaching 624.8 trillion won ($539.3 billion) as of the end of October, up 9 trillion won from the previous month, which was driven by rounds of rate cuts aimed at boosting the sluggish growth momentum.

Over the past year, the Bank of Korea has cut the key rate to a record low of 1.5 percent as part of the Seoul government's economy-boosting measures.

Analysts have called for a slew of measures to prevent a debt-triggered financial crisis as the U.S. Federal Reserve is set to raise its rate next month for the first time in a decade.

But Byrne said South Korea is strong enough to get over the headwinds from the U.S.

"Korea is in a pretty good position to stand this. (Korea) has monetary policy space, external vulnerability has been greatly reduced and Korean corporations have well contained the level of external debts," said Byrne, a former analyst for Moody's.

"So I am not expecting any major dislocation to the Korean economy once the U.S. begins the process of liftoff."

At the end of 2014, South Korea's foreign exchange reserves reached $368 billion, ranking sixth in the world, with its trade surplus continuing for 43 straight months in September.

He also said a higher rate would play a role in reducing household debts to some extent in the longer term.

"(Rising household debt) is because of the low interest rate and also because of macroprudential easing," he said. "When the interest rate starts rising, Korean households will borrow less and it could be a silver lining in the clouds."

The Financial Services Commission, the country's financial market governing body, has taken a set of measures to tackle the fast-rising household debts.

It has pumped a combined 40 trillion won ($34.2 billion) to help borrowers convert their short-term floating-rate mortgages into long-term fixed rate ones in a bid to make borrowers get ready for a potential rate hike. (Yonhap)