[Opinion] Triple Debt Burden, Is It Okay to Stay Like This?

The Revenge of 5500 Trillion Won Debt
If Neglected, the Three Economic Sectors Will Collapse

Debt is the problem. The three main economic sectors are burdened with enormous debt. As of the end of 2022, household debt stood at 1,870 trillion won, corporate debt at 2,590 trillion won, and national debt at 1,068 trillion won. It is literally a ‘debt republic.’ Proper management is urgently needed because debt gradually erodes potential competitiveness.

In fact, having too little national debt is not necessarily the best. If the government is too stingy, the lives of the people become marginalized. Therefore, debt should be incurred but managed at an appropriate level. So far, Korea has boasted of ‘sound fiscal management.’ The national debt-to-GDP ratio remained below 40% until 2019 (37.6%). In May 2019, former President Moon Jae-in suddenly questioned, “What is the basis for managing the government’s national debt ratio around 40%?” and loosened fiscal reins. This ratio rose to 43.6% in 2020, 46.9% in 2021, and 49.6% in 2022. The pace is too fast. This is why calls for legislating fiscal rules have grown louder. A bill proposing to manage national debt and the fiscal management deficit within 60% and 3% of GDP, respectively, is currently dormant in the National Assembly. Meanwhile, the five ruling and opposition members of the National Assembly’s Planning and Finance Committee, who should handle this bill, went on an 8-night, 10-day business trip to Europe at the end of last month. The national debt issue is a fire on the doorstep, yet they continue to talk about benchmarking. As former UK Chancellor of the Exchequer George Osborne said, “If a country cannot control its debt, debt will control the country.” There is no time to delay the legislation of fiscal rules.

Corporate debt is also frightening. Of course, no company operates solely with its own money. If a company borrows appropriately to expand investment scale, it can maximize profits. Such leverage skills are also part of management ability. However, excessive debt is risky. At the end of last year, corporate debt of 2,590 trillion won was 10% higher than the previous year. In a high-interest-rate environment, excessive debt becomes a boomerang. Many marginal companies cannot even pay interest with their earnings (operating profit). According to the Bank of Korea, based on last year’s performance, about 3 out of 10 companies (726 out of 2,156, or 33.7%) fall into this category. When debt is too high, even profitable companies cannot invest because they must repay debt, leading to economic recession. This is called a ‘balance sheet recession.’ Once it reaches this point, there is no solution. It creates a vicious cycle of ‘debt reduction, investment decline, and economic downturn.’ This is why regulatory authorities must be thorough in managing corporate debt.

Household debt is the most frightening because there is no place to lean on. This is according to Professor Lee Kwan-hwi of Seoul National University’s Business School. “Companies and households bear debt risk differently. Companies can solve problems through restructuring or M&A in the worst case. But you cannot restructure or merge families, can you?” It is not easy to resolve, and ultimately society or the state must bear the burden. According to the Financial Supervisory Service, the delinquency rate on such household loans reached 0.32% as of the end of February, continuing to rise from 0.19% at the end of September last year. Meanwhile, the stock market’s credit loan balance is fluctuating again, exceeding 20 trillion won. Leverage becomes a double-edged sword in a declining market. When forced sales of stocks or real estate auctions proceed, even one’s original assets are wiped out. Household debt must be carefully monitored not only by regulatory authorities but also by financial companies. Didn’t Keynes warn early on? “If you borrow 100 pounds from a bank, that is your problem, but if you borrow 1 million pounds, that is now the bank’s problem.”

This content was produced with the assistance of AI translation services.