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After Credit Binge In South Korea, Big Bill Comes Due Government Pushed Plastic To Juice Up the Economy; Banks, Borrowers Suffer
By HAE WON CHOI and GORDON FAIRCLOUGH Staff Reporters of THE WALL STREET JOURNAL
SEOUL, South Korea -- A household-debt crisis rocking South Korea provides a chilling warning to developing nations around the world: Doling out credit cards to boost consumer spending can juice growth in the short run, but the ultimate consequences -- for financial institutions and the economy -- can be dire.
South Korea once boasted one of the world's highest savings rates. But in a sharp about-face over the past few years, consumers -- with government prodding -- have gone on a credit-fueled buying binge. Now, the bill is coming due, as mounting credit-card defaults traumatize families and rock the nation's financial system.
Between 1999 and 2003, South Korea's total outstanding credit-card debt grew more than five-fold. By the third quarter of last year, the latest period for which figures are available, Korean consumers had run up a collective credit-card balance of $57.47 billion, compared with $10.95 billion at the end of 1999.
Many are having trouble paying their debt. South Korean regulators say the nationwide credit-card-delinquency rate, defined as the percentage of loans that are more than 30 days overdue, jumped to 13.5% in November, compared with 2.6% at the end of 2001. Some industry executives, however, say the actual proportion of bad loans may be as high as 30%, given aggressive efforts by lenders to mask the problem. In the U.S., by contrast, bankers are wringing their hands over new data that show Americans hit a record-high credit card delinquency rate of 4.09% in the third quarter of 2003.
Debt-related murder-suicides and other crimes have become a regular staple of South Korean newspapers and TV news broadcasts. Last summer, a 34-year-old woman pushed her two daughters, ages 3 and 7, out the window of the family's 15th-floor apartment. Then, holding tight to her 6-year-old son's hand, she jumped, too. Police say the woman, a dishwasher who they would identify only as Mrs. Sohn, was distraught over $25,000 in credit-card debt that she and her husband, a construction worker, couldn't repay.
Because Korea's social structure makes family members feel accountable for each other's debts, one person's credit problems often ripple outward through entire families and social networks, curbing the spending of large groups of people and potentially prolonging a slump in consumer spending. Kim Jun Ho, an animator in Seoul, complains bitterly that his entire family has been turned into "credit-card slaves," with family members having to devote much of their income to supporting his sister and repaying her $42,000 in credit-card debt.
All the bad loans are putting a serious strain on South Korea's banks and other financial institutions, which are still recovering from the Asian financial crisis of the late 1990s, when bad loans to big conglomerates brought many to the brink of collapse. Earlier this month, banks had to intervene to rescue the country's largest card issuer, LG Card Co., from insolvency with a $3.19 billion bailout package.
Similar problems have also started to crop up in other Asian nations (see related article1). As countries in the region tried to get their economies rolling again in the wake of the late-1990s financial crisis, many nudged banks to make consumer borrowing easier as part of a strategy to strengthen domestic consumption and reduce the countries' reliance on exports. South Korea even offered consumers tax breaks for credit-card use.
In Taiwan, outstanding credit-card debt has ballooned 80% over the past three years. In Hong Kong, rising card debt has helped spur a 28-fold increase in personal bankruptcies, compared with five years ago. And in Singapore, personal bankruptcies were up about 20% in 2003 from the year before.
Some governments are now trying to rein in consumer credit. Thailand has raised income requirements for cardholders and Taiwan has strengthened controls on card issuers. Singapore is clamping down on aggressive credit-card marketing techniques.
Much of the pain from Asia's bad loans could be offset as the countries' export industries pick up steam. Economists estimate that South Korea's gross domestic product will grow 5.2% in 2004, compared with an estimated 2.9% in 2003, powered by an expected 13.2% increase in exports. Even so, analysts worry that credit problems could make Asia's economies extremely susceptible to external shocks and further constrain growth if the problems continue to spread.
Kim Sang Mi, Mr. Kim's sister, got in on South Korea's credit boom -- and bust -- at the beginning. One of the first things she did when she moved to Seoul in 2000 was go online and apply for two credit cards. She used them to buy furniture and appliances for her new apartment. Then she branched out into purchases of hip clothes and fancy cosmetics, things she couldn't get in the small town on Korea's southwest coast where she grew up. She also started going out with friends to restaurants and bars, charging nearly everything. She says she was motivated to use credit cards instead of cash because she wanted to take advantage of the tax breaks offered by the South Korean government.
"I wanted to blend in, be like people in Seoul," says Ms. Kim, now 27 years old and an accountant at an online game company. "I would buy things with my credit cards, making all sorts of distorted calculations in my mind of how I would pay the bills." About a year into her shopping spree, Ms. Kim was struggling to pay her bills. She started taking cash advances on some of her cards, which by then numbered five, to make the payments on the others.
Ms. Kim borrowed thousands of dollars from her friends and family, wiping out much of the savings of her brother and parents. Then, early last year, after she had run up a tab of more than $42,000, her juggling act failed. Her card companies pressed her to restructure her debt. To do that, her parents and her brother had to sign as guarantors.
Under her new deal with the card companies, Ms. Kim must devote nearly her entire salary of about $1,100 a month to card payments for the next three years. She seldom goes out and volunteers to work late so that she can get free meals from her company. Her brother pays most of her rent and living expenses, and for the past two months, about half his salary has gone toward paying her card bills.
Unsustainable household debt burdens have led to serious declines in consumer spending in South Korea. In the first nine months of 2003, the latest period for which data is available, private domestic consumption fell 1.1%, according to the country's central bank, compared with a 6.8% year-on-year increase in 2002. Korean department store sales in 2003 fell 6.3% below 2002 levels.
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The current mess has its roots in a South Korean government campaign -- starting in 1999 -- to strengthen domestic consumption. The government established rules allowing consumers to deduct some credit-card purchases from their taxes and pushed for low interest rates to stimulate spending. It also lifted a ceiling on cash advances. Previously, individuals had been allowed to take out only about $600 a month in cash through their credit cards. The government further slashed taxes on luxury goods and cars to encourage spending.
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