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South Korea loses its nerve on
credit
By David Scofield
SEOUL - The South Korean government is
backtracking on recently enacted legislation designed to
stem an alarmingly growing mountain of household debt,
and is instead loosening credit policies again in the
hope that more credit will spur consumption and move the
economy forward.
Loose credit policies have,
after all, kept the economy afloat since 1998, but with
record debt levels and millions in default, the South
Korean consumer is looking increasingly spent and the
economic situation is starting to look chancy. Starting
in 1998, consumer credit became ridiculously easy to
acquire, with credit limits seemingly unrelated to
ability to repay. Credit-card companies and banks
extended credit with little concern for repayment risk
in the knowledge that the government wanted to increase
debt spending, with the strong implication that credit
was tacitly underwritten by the national treasury.
Nor is South Korea alone. Since the end of the
1997-98 Asian financial crisis, growth in credit-card
debt seems to be reaching epidemic proportions
everywhere in Asia, consistently outstripping gross
domestic product (GDP) growth. According to consultancy
McKinsey, the growth in credit cards has been
accompanied by rapid growth in defaults in country after
country. Thailand is thought to be the next basket case.
In Hong Kong, personal bankruptcies in 2002 were more
than 28 times those in 1998 (see Asia's Hello Kitty consumers lap up
credit, September 19).
While South
Korea is certainly not the first or only country to
initiate loose credit policies to spur domestic spending
and economic growth, when the banks and the credit-card
companies issue credit with little regard to risk, and
fiscal policy becomes a political tool to win over young
indebted voters, short-term growth could well be
eclipsed by long-term economic stagnation as hundreds of
billions of dollars of debt is left to subsequent
generations of taxpayers to service.
Students,
teenagers and the unemployed are often allocated
per-card spending limits over US$10,000, greater than
the country's per capita income. According to the
country's Financial Supervisory Service more than 100
million credit cards are in circulation in South Korea,
more than double the national population.
Unlike
the United States, where the "working poor" have
witnessed the largest rise in credit-card usage as
plastic has become a way to put food on the table, in
South Korea it's the "yet to be employed" who hold the
most debt: students who have never held a job and
housewives who have never worked outside the home.
It is not uncommon to hear of university
students with credit-card debt above $100,000. Indeed,
those in their 20s and 30s make up more than 50 percent
of the credit-card defaulters in South Korea.
A
local paper recently described a 32-year-old single,
unemployed mother of one who had accumulated $230,000 in
credit-card debt in just three years, 23 times the per
capita income level and 15 times the average starting
salary in one of South Korea's chaebol (business
conglomerates). According to the same report, "Ms Kim"
and at least 235 other severely indebted people have
been released from their debt so far this year, with
taxpayers ultimately left to pay for it all.
Household debt has surpassed $375 billion, about
84 percent of South Korea's GDP, with household debt to
equity nearing the 50 percent mark, almost double that
of the United States, Japan or the United Kingdom - more
than 3.4 million creditors are in default. Violent
crimes related to unserviceable debt are skyrocketing as
police struggle to cope with an influx in debt-related
murders and kidnappings.
In late spring, new
legislation was passed mandating that credit-card firms
curb their credit allocations, insist on credit checks -
this was not done before - and temper cash loans.
According to the Financial Supervisory Commission this
move helped to lower credit-card usage from $138 billion
in the first quarter of this year to $105 billion in the
second.
But with the economy struggling, debt
default rising and a shortage of ideas as to how to
propel the economy forward, the administration of
President Roh Moo-hyun announced last week its intention
to ease credit regulations again, in effect opening the
door to more bad loans and a surge of credit defaulters
down the road.
With a strategy of immediate
growth at any cost, the administration plans to roll
over and reschedule a substantial portion of the $370
billion-plus currently owed by South Korea's households,
and more than a million delinquent debtors would have
their debts rescheduled or totally forgiven. They are to
be removed from credit blacklists, their credit
re-established.
Those working and struggling to
pay the debt they owe, shackled with 20 percent-plus
interest rates, will receive no help, as this initiative
is only available for those who are delinquent, defined
as anyone having more than $300 in debt, unserviced for
at least three months. This is prompting many indebted
South Koreans to question the logic of paying what they
owe if the government is willing to pick up the tab.
And it does not end with the consumer, as the
government has also stepped in to stem the tide of
bankruptcy among credit-card firms. The People's
Solidarity for Participatory Democracy, a South Korean
non-governmental organization, estimates that
credit-card firms have issued more than $75 billion in
bonds to help pay for the debt, most of it held by
government-invested trust funds, insurance companies and
banks.
And the moral hazard is spreading, as
just this week it was revealed that South Korea's card
issuers have been classifying short-term defaulters as
long-term bad debt, allowing them to shift billions of
debt to Korea Asset Management Corp, a state-run agency
set up to assume chronic bad debt, artificially reducing
the amount of unserviceable debt on the credit-card
companies' books.
The timing of Roh's
announcement is also curious, as this debt-forgiveness
initiative will target the 20s-30s demographic most
directly, since they hold more than 50 percent of the
country's bad debt. They also happen to comprise the
core group of Roh's supporters, a vitally important
group to keep placated if his newly formed party is to
gain seats in National Assembly elections slated for
next spring.
David Scofield is a
lecturer at the Graduate Institute of Peace Studies,
Kyung Hee University, Seoul.
(Copyright 2003
Asia Times Online Co, Ltd. All rights reserved. Please
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