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September 25, 2012

South Korea Faces Looming Debt Crisis

by Jason Strother

South Korean economic analysts say rising household debt indicates a U.S. or European-style debt crisis is looming.

Baek Seong-jin, who runs a financial advocacy group just across the street from the South Korean National Assembly building, says he sees the signs that times are getting tough for many families.

Baek says he has seen two to three times as many people going broke and declaring bankruptcy than a year ago.  He says inflation, stagnant wages and high interest loans are reasons why his clients cannot afford to pay their bills.    

From saving to overspending

South Korea has changed from a nation that traditionally saved money to one that is overspending.  And now, experts are warning that South Korea could join the United States, Europe nations and others that are experiencing a debt crisis.    

Jeong Young-sik, an analyst at the Samsung Economic Research Institute in Seoul, says Korean households have not gotten the message yet.

"In the U.S., Japan and European countries, household debt is decreasing.  But in Korea, household debt is increasing," Jeong said.

A recent report by the Bank of Korea says household debt is nearing $600 billion.  The Organization for Economic Cooperation and Development says Korean families are spending about one-and-a-half times what they earn each month.  That is one of the highest ratios in the developed world.

Debt burden

According to Jeong, real estate and education are the two biggest expenditures that are putting households into debt.

That is the case for Cheon Sun-kyoung’s family.  Two years ago, she took out a $100,000 loan for a new apartment in a pricey Seoul neighborhood so her teenage daughter could attend what she considers to be a better school.

Cheon says the family’s budget is now very tight.  She says, since moving her family, it has been impossible to save money because they are paying off the loan.  Cheon even has to go to another neighborhood to buy groceries at cheaper supermarkets.

Jeong Young-sik says South Korea faces a similar situation as Japan did back in the 1990s.  Then, Tokyo had to bail out families who were submerged in debt.  Now, Japanese government debt is 200 percent of its GDP.

Jeong says Japan has not been able to get back on its feet, in part, because of  its low birthrate and high number of non-working senior citizens.  It is a problem that Korea is now facing.

"In the long term, the debt crisis is likely to happen in South Korea because the population will decrease, the working force will decrease.  That means, I think, the housing price will begin to fall," Jeong said.

Jeong predicts that, between 2015 and 2020, the South Korean government might need to intervene to prevent the nation from going into crisis.

Jeong says a government bail out would hurt Korea’s economic credibility and keep foreign investors away, as it has done in other nations.  

"The Korean government got a lesson from European countries, the U.S. and Japan," he said.  "The Korean government doesn’t want to increase government debt sharply."

If South Korea is to avoid that scenario, households will have to tighten their belts and start saving money again, Jeong adds.