Household Debt May Exert Negative Influence on World Economy

The Bank for International Settlements (BIS) has warned, “The worldwide tendency of household debt increment can give a ‘shocking influence’ to the economy of each country.”

In Korea, as household debt has increased in the recent several years and has become an obstacle in economy recovery and the augmentation of consumption, this indication from BIS is significant.

In accordance with the Ministry of Finance and Economy on March 9, BIS, with its headquarters in Switzerland, pointed out in its periodical report, “Due to the tendency of low interest and expansion of bank loans, household debt is rapidly growing on a worldwide scale. The increase in the unemployment ratio and the falling tendency in the household’s capacity of debt repayment may give a ‘critical influence’ to the macro-economics.”

BIS added, “The increased amount of housing loan has exerted influence on the ascending tendency of household debt. If housing prices depreciate, many people will be eager to sell their houses to repay their debts, playing the role of catalyst for the sharp decline of housing prices.”

BIS has predicted that in the case of Korea, where the loans depending on the flexible interest rate are larger than the loans relying upon the fixed interest rate, it will be more greatly influenced than will other countries from the skyrocketing household debt.

In advance of this address, the International Monetary Fund (IMF) has also recommended Korea to draw up an appropriate countermeasure against the increasing household debt.

In the Korean monthly report issued on February 25, “The ratio of household debt to the Gross Domestic Profit in Korea has surpassed the 70 percent level, making it more difficult for consumption rate to recover,” assessed IMF, adding, “Although Korean banks limit the Loan To Value (LTV) ratio to under 60 percent level, the depreciation of housing prices will impose a heavy burden on the financial health of the banks and households.”

According to the Bank of Korea, the amount of household debt has skyrocketed, from 266,898 billion won at the end of 2000 to 447,567 billion won last year.

Chi-Young Shin Jong sik Kong higgledy@donga.com kong@donga.com