Korea needs more reform, not more leverage: analyst

Benefits could quickly fade.

Starting from the mid-2000s Korea attempted to restrain household leverage on the one hand, while slowly restructuring debt on the other.

According to UBS, historically, many Korean households have only paid interest on floating rate bullet loans. The principal is not amortized and normally rolls over every few years; i.e., the principal is often never repaid. 

UBS adds that administrative policies were put in place to slow credit and encourage financial institutions to convert floating rate bullet loans into long-term fixed rate mortgages that would be properly amortized. Debt could be slowly paid down and households would face less interest rate and roll over risk. 

Duncan Wooldridge of UBS says, “The new policies retain this restructuring aspect with one a catch – they encourage household credit to grow much faster than income. There may be a short-term gain for the economy, but we expect any benefits to quickly fade. Korea needs aggressive reform in the SME sector to raise productivity, not more leverage, as it faces a dance with debt and demographics.”