Preventive steps needed to head off financial collapse
There were about 381,000 high-risk households with total combined financial debt amounting to 69.4 trillion won ($48.7 billion) as of the end of last year, the Bank of Korea said Monday. High-risk households refer to those heavily burdened by servicing debts and mired in difficulty repaying their borrowings through asset sales, according to the BOK.
The central bank predicted that if it takes a "big step" to raise its benchmark interest rate by a half percentage point, interest on all borrowers will grow by 6.5 trillion won. When private debt levels are high, inflationary pressure and a consequent rise in interest rates strain the ability of borrowers to repay their debt. That, in turn, works as a factor increasing financial market volatility.
The BOK's rate-setting committee, which will meet Wednesday, will likely take a big step for the second time this year. If interest rates go up steeply, the interest burden and insolvency risk of high-risk or vulnerable borrowers will increase. If this situation is not managed properly, it could pose a risk to the entire economy. That is why financial authorities should take preventive steps.
More than 60 percent of household debt consists of mortgage loans with a relatively low delinquency ratio. Therefore, the massive amount in household loans is unlikely to cause a serious problem immediately for the financial sector or the national economy. However, if interest rates keep rising and internal and external economic conditions worsen, vulnerable and highly indebted households are feared to face increasing difficulties in repaying their loans.
If a financial shock becomes a reality amid soaring interest rates, Korea's household debt, which is the world's largest compared to the nation's GDP, could become a financial time bomb. Therefore, the government ought to take preemptive measures to ease the increasing interest burden on vulnerable borrowers and low-income households. In addition, it must make efforts to prevent a surge in debt defaults that could lead to a financial meltdown. It is also necessary to reduce the overall household debt, which reached a record level of 1,869 trillion won in June, equivalent to 104.3 percent of the nation's GDP ― the highest among the OECD member states.
There were about 381,000 high-risk households with total combined financial debt amounting to 69.4 trillion won ($48.7 billion) as of the end of last year, the Bank of Korea said Monday. High-risk households refer to those heavily burdened by servicing debts and mired in difficulty repaying their borrowings through asset sales, according to the BOK.
The central bank predicted that if it takes a "big step" to raise its benchmark interest rate by a half percentage point, interest on all borrowers will grow by 6.5 trillion won. When private debt levels are high, inflationary pressure and a consequent rise in interest rates strain the ability of borrowers to repay their debt. That, in turn, works as a factor increasing financial market volatility.
The BOK's rate-setting committee, which will meet Wednesday, will likely take a big step for the second time this year. If interest rates go up steeply, the interest burden and insolvency risk of high-risk or vulnerable borrowers will increase. If this situation is not managed properly, it could pose a risk to the entire economy. That is why financial authorities should take preventive steps.
More than 60 percent of household debt consists of mortgage loans with a relatively low delinquency ratio. Therefore, the massive amount in household loans is unlikely to cause a serious problem immediately for the financial sector or the national economy. However, if interest rates keep rising and internal and external economic conditions worsen, vulnerable and highly indebted households are feared to face increasing difficulties in repaying their loans.
If a financial shock becomes a reality amid soaring interest rates, Korea's household debt, which is the world's largest compared to the nation's GDP, could become a financial time bomb. Therefore, the government ought to take preemptive measures to ease the increasing interest burden on vulnerable borrowers and low-income households. In addition, it must make efforts to prevent a surge in debt defaults that could lead to a financial meltdown. It is also necessary to reduce the overall household debt, which reached a record level of 1,869 trillion won in June, equivalent to 104.3 percent of the nation's GDP ― the highest among the OECD member states.
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