By Yoon Ja-young
President Moon Jae-in’s pledge to write off insolvent debt is drawing concern over a moral hazard, despite consensus that the troubled debtors should get a chance for normal economic activities.
The new president has promised to forgive small debts less than 10 million won that have been overdue for over 10 years. The debtors will go through a screening process to determine whether they are really incapable of paying back their debts, taking into account diverse factors such as age, income, assets, and spending.
The new administration already decided to write off 1.9 trillion won credit held by the National Happiness Fund, which will benefit around 437,000 debtors. The measure will relieve each of them on average of 4.35 million won debt.
The administration also plans to purchase additional bad debts through state-run financial institutions so it can have them written off.
By writing off the small-sum, long-overdue debts totaling 11 trillion won, over 1 million people who had problems in financial transaction due to the debt will be saved, returning to normal economic activities. The government also expects the measure to help decrease the snowballing household debt, which amounts to 1344 trillion won and is threatening the economy.
However, market watchers point out that the new administration should take into account the side effect.
“For extremely vulnerable households, write-off is inevitable. If they weren’t capable of paying back small debts for over 10 years, it means there is no other way. The long-term economic slump aggravated the problem. However, the government still has the problem of funding,” said Oh Jung-geun, a professor of economics at Konkuk University.
He also pointed out the moral hazard.
“There are also people who paid back loans despite economic difficulties. The issue of the moral hazard will be inevitable,” he added.
Critics point out that each administration has been repeating cancelling debt.
Former president Park Geun-hye’s administration also pledged to relieve 3.22 million long-term debtors through the government’s National Happiness Fund. It ended up benefiting 2.87 million people. It purchased the insolvent credit at low prices, around two or three percent of the principal, and wrote off around 90 percent of the debt. The debtors had the obligation to pay back the rest. According to Korea Asset Management Corp., the government fund purchased the credit of 2.87 million people at 591.2 billion won, which is only 2.1 percent of the principle. It collected 1.65 trillion won from the debtors. When compared with the purchasing price, it recorded 280 percent investment return.
The President Moon administration, however, is different from previous administrations as it plans to cancel all of the principal and interest, leaving the debtors with no obligation to pay any of it back.
Analysts also point out that writing off debt is not a fundamental solution. The government should examine why they have to get loans in the first place. They say bolstering the social safety net and creating more jobs could help prevent the bad debt.