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A bloody cold winter weather ahead, there has sounded a series of alarms of an upcoming perfect storm in the financial markets. Many stock market analysts, economists and some of the high ranking bureaucrats alike have warned of the potential calamitous event in the Korean financial markets in the near future.
Carefully investigating their analyses, the apocalyptic views unmistakably anchored on the fact the household debts in Korea have been so extravagantly huge as to make its financial collapse inevitable. Being about the size of GDP, it is argued that such an enormous amount of household debts had driven up both the stock markets and the housing prices for the last several years, but now, they would have to sooner or later face the challenges of higher interest rates and squeezing loans following the global tapering.
Indeed, the Bank of Korea has already raised its policy rate from 0.5 percent to 0.75 percent last August, and publicly implicated another hike this year. On top of this rate hike, the chairman of the Financial Service Commission has strongly urged all the financial institutions to maintain the household loan growth rate within 6 percent. These two policy actions have wreaked havoc on the market floor as tens of thousands un-informed borrowers were either negated or cancelled the previous loan contracts. This loan market mayhem somewhat subsided as the commissioner finally gave in last October to allow the loans for rent to be excluded from the lending constriction, and the fear of a sudden loan shut-down lingers around as the 6 percent loan growth curtain is still in effect.
Despite this rather common and popular prospect of a doom, a serious question has to be raised about the legitimacy of the 6 percent target rate of debt growth. Although household debts have been increasing at an alarming rate for most of the last decade, there is neither scientific nor practical rationale why it has to be under 6 percent. In fact, the rate of household debt growth has mostly been higher than 6 percent for the last 15 years since 2005 except for 2018 and 2019, in which years it was 5.6 percent and 4.0 percent, respectively. Of course, there have been warnings and alarms about the debt surge almost every year, but debt growth higher than 6 percent for a decade has not caused serious actual and tangible threats to the integrity of the financial markets.
Mostly vain and antiquated household debt warnings put aside, there lurks another potential risk of supply chain bottlenecks that had driven up prices and inflation all over the world. But this supply side irritation should be temporary in its nature and should not last longer than a few quarters, at best. It is not argued here that global inflation would disappear soon. It might linger on a few quarters and possibly a year or two, but it could not drive up to, lets say, 4 percent or 5 percent, indefinitely. In such cases, the global interest rates would go up by 1 percent point, at the most, and this should not pose a grave concern for a global perfect storm.
By Professor Se Don Shin
Professor Emeritus, Sookmyung Women’s University
The opinions expressed in this article are the author’s own and do not reflect the views of KOTRA