[Editorial] Rising household debt

The government last week announced a set of measures to curb mounting household debt that is becoming the main drag on Korea’s economy as it dampens consumer spending. Finance Minister Hyun Oh-seok hoped that the measures would help ease debt-servicing burdens and increase consumption expenditure.

Regretfully, it seems doubtful that the package, which was drawn up by the Finance Ministry, the Land Ministry, the Financial Services Commission and the central bank, will bring about the effects expected by the finance minister.

Most of it repeated or was little different from previous policies that have proven insufficient and ineffective in coping with household debt problem.

According to data from the central bank, household credit in Korea totaled a record high of 1,021 trillion won ($954 billion) at the end of 2013, up 57.5 trillion won from a year earlier. Over the past five years, the country’s household debt has grown by more than 40 percent, while most advanced economies have implemented active deleveraging policies since the 2007-08 global financial crisis.

As of the end of 2012, Korea’s ratio of household debt to disposable income stood at 163.8 percent, far above the average of 134.8 percent for the 34 member states of the Organization for Economic Cooperation and Development. The ratio is estimated to have exceeded the mid-160 percent level at the end of last year, according to the FSC.

It is reasonable that the financial regulator has set the ratio as the key barometer for managing household debt, seeking to lower it by 5 percentage points from the current level by the end of 2017.

Overly hasty efforts to cut household debt may do unnecessary and unintended damage to the economy. Nonetheless, the reduction target set by financial authorities seems somewhat low for the seriousness of the problem.

Furthermore, the package unveiled last week does not seem likely to be able to attain even this moderate goal.

The core policy is to raise the proportion of long-term fixed-rate mortgage loans with no grace period to 40 percent in four years from now. The ratio currently remains below 20 percent, with the bulk of mortgage loans carrying long grace periods and floating rates. Financial experts have noted this practice has led households to be less cautious about borrowing money and exposed to higher debt-servicing burdens when market rates rise.

It should be brought up that the government put forward a similar policy less than three years ago ― the targeted ratio was 30 percent at the time ― only to see household debt continue to swell.

More active and effective efforts are needed to put the deteriorating problem under control before it is too late. Among the more specific and surgical measures that have yet to be worked out is strengthened support for heavily indebted low-income families.

It should also not be forgotten that increasing household income by creating more decent jobs would be the fundamental way to avoid the problem further eroding growth potential and suffocating economic vitality.