Deepening debt crisis

Financial Services Commission Chairman Kim Suk-dong has reportedly been losing sleep over soaring household debt. One can hardly believe it, watching the FSC???s ``comprehensive measures for the soft landing of family debt??? unveiled Wednesday.
Put in point-blank terms, the package???s title is a misnomer; it is neither comprehensive nor can ensure a soft landing.
The policy package, which calls for restructuring existing loans and making it harder for both lenders and borrowers to agree new ones, may help to block further increases in household debt at best.
At stake, however, is how to begin to reduce the total of nearly 1,000 trillion won ??? equivalent to the nation???s GDP ??? owed by individuals to banks and non-bank lenders. The household debt at 153 percent of disposable income has long exceeded the average of OECD countries and is even higher than the U.S.???s ratio in 2008.
Admittedly, this is a comprehensive problem for which there can be no easy, quick fix. For the package to go anywhere, it should include ways to help increase people???s income and create more jobs, which in turn requires a change in overall economic management. But the measures worked out by the financial regulator, or actually the government, are too weak and indirect.
It is doubtful the authorities will be able to attain even their modest goal of curbing new household debts. The package tries to drastically raise the portion of fixed-interest loans from the current 5 percent of the total to 30 percent by 2016. But borrowers will find few reasons to make the shift, as long as their current floating-rate mortgages offer less interest burdens. The government???s tax incentives are too small and unrealistically geared to inexpensive homes.
The seed of debt crisis was sown by previous governments, but the Lee Myung-bak administration cannot deny it has sharply deepened it by wrong economic policies. It had the opportunity to tackle it in the wake of the subprime crisis of 2008, since when most other countries have undergone the process of ``deleveraging??? to control asset bubbles. Seoul has run counter to the global trend by trying to bolster the proper market and pursuing ``jobless growth??? at the expense of inflation, aggravating the already poor ability of people to repay debts.
All this shows the household debt crisis cannot be solved by just rectifying lending practices.
The government should be more active to curb it by, for instance, lowering the share of household debt in banks??? loan portfolios to below the nominal GDP growth rate, or more preferably, to the increase of families??? disposable income, and pull down the loan-to-deposit rate itself to 100 percent or lower.
It may not be easy for officials to take such direct regulations in view of their impact on the financial markets especially in the election year of 2012. But nothing less would keep the snowballing debt crisis from throwing the financial sector, and the whole economy, into another crisis before long.
Going further, the Lee administration must consider introducing the sophisticated mortgaging system in place in some European countries, which can help securitize household debt and save debtors from the brink of private bankruptcies or the foreclosure of their homes.
If the Lee administration shies away from these bolder approaches for political reasons, the timidity would not only damage its electoral fortunes but go down as one of its most shameful legacies.
The latest package has not defused the ticking bomb but reset its time switch. And it should not be the FSC head but President Lee who lies awake at night.
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