South Korea tries to curb mounting household debt and avert a crisis

SEOUL — At a time when much of the advanced world is unloading its debt, South Koreans are still borrowing at a feverish rate that economists say is unsustainable — and potentially dangerous.

South Korean household debt stands at 155 percent of disposable income, according to the Organization for Economic Cooperation and Development. That’s higher than the rate in the United States at the start of the subprime mortgage crisis and well above the rates in Asia’s other major economies, China and Japan, which emphasize disciplined savings. For more than a decade, the country’s household debt has grown about 13 percent annually, twice the growth rate of the gross domestic product.

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It’s the lesson of the 2008 global economic crisis that such runaway borrowing often ends with disaster. The problem builds quietly as households take out loans backed by the prices of their homes and then explodes as home prices drop, people default en masse and banks cannot recoup their money. The government increases its own debt load, buying up the sour loans or bailing out the financial system.

But South Korea is a rarity among the world’s major economies — it largely sidestepped the 2008 financial crisis. The trauma was so short-lived here that it prompted none of the belt-tightening seen elsewhere. The worst-case scenario now — though it is not immediately likely, government authorities say — is that South Korea will find itself in the devastating cycle other major economies went through several years ago.

South Korean regulators are instead trying to pull off what they describe as a “soft landing,” using policy to make people more cautious about how they spend — before a crisis does. The plan, rolled out in June 2011, includes a wide range of limits on bank lending, as well as tax breaks for homeowners who switch from adjustable-rate to fixed-rate mortgages, lessening the blow of a potential interest rate shock. (About 95 percent of mortgages are currently adjustable.) The government has also asked banks to toughen their scrutiny of borrowers’ creditworthiness.

Austerity actions

The regulations mark South Korea’s first move toward austerity, and they are controversial because they could choke off growth, particularly in the housing market. Some critics say the country would be better off loosening the reins and allowing borrowers more freedom in the hopes that it would spur growth and drive up incomes. If incomes rise, those critics say, the debt-to-disposable-income ratio drops — and the debt problem is solved without the pain of de-leveraging.

Kim Tae-hyun, a policy expert at the Financial Services Commission, Seoul’s regulatory agency, acknowledged the conflicting arguments about how to handle the debt problem.

“But if we waited until it rose any further,” Kim said, “it would be harder to control.”

Recent signs suggest optimism: South Korea’s total household debt fell slightly during the first three months of 2012, the first quarterly drop-off in three years, according to the Bank of Korea. But regulators caution that borrowing always skews low at the start of a year, and they say it is too early to evaluate whether the new measures are working.