Koreans weighed down by debt pile-up

North Korea may be testing nuclear devices and threatening to crush their southern neighbours like rats on a regular basis, but South Koreans right now seem to be focused on more pressing threats to their economic wellbeing.

Household debt reached another record high in the fourth quarter of last year, and is seen as the biggest risk to South Korea’s financial system, according to a central bank survey in January of 90 experts and fund managers.

Koreans’ total household debt, including private loans and credit card debt, surged to a record 959.4 trillion won, about €670 billion, in the last quarter of the year. This is equivalent to more than 70 per cent of the country’s 2011 GDP.

The rate of expansion of household credit was the slowest since March 2005, on the back of sluggish consumer confidence.

Household debt reached 164 per cent of disposable income in 2011, compared with 138 per cent in the United States at the start of the housing crisis. Mortgages from banks, insurers and smaller savings banks accounted for about 42 per cent of all household borrowing and credit purchases, according to the Bank of Korea.

Like many Asian economies, Korea is heavily dependent on exports for its economic well-being but the government is keen to boost domestic consumption. However, the lack of disposable income among highly indebted households is making this task more difficult.

The heavy household debt burden is a major challenge for newly elected president, Park Geun-hye, who pledged to bring in a “People’s Happiness Era”, which will swell the middle classes to 70 per cent of the 50 million population, from 67.7 per cent now. She plans to start on this task after she takes over the presidency this week.

In scenarios familiar to many in Ireland, the credit boom caused house prices to soar and left many Koreans with large mortgages. Credit growth has slowed as households repay what they owe, which drags on consumption.