That might be South Korea’s motto now. While Asian nations from China to Thailand have recently introduced credit cards into consumer culture, only South Korea has seen this basically smart idea backfire spectacularly. The Asian currency crisis of 1997-98 showed that many of the region’s economies were too reliant on foreign borrowing and foreign demand. They could not live by exports alone, and had to encourage a modern consumer shopping culture at home, too. That meant credit cards. But only South Korea tried to create a plastic-driven economy overnight.
Just months after the December peak of the ‘97-‘98 crisis, Seoul phased out limits on credit-card cash advances, offered tax breaks for credit-card spending and later introduced a lottery for cardholders. Koreans took the bait, and surging credit-card spending drove up GNP growth to double digits in 1999 and 2000, until the debts came due. “Because of household spending, we enjoyed boom times when the rest of Asia was sluggish,” says Choi Gong Pil at the Korea Institute of Finance. “Now Korea’s economic growth is curbed by the household-debt problem, while other Asian nations are ready to boom.”
A policy designed to boost consumption is now the chief drag on consumption. GNP growth fell to under 3 percent last year, and unemployment rose to nearly 4 percent as South Koreans struggled with the heaviest household debts in the world. A new report from Morgan Stanley says surging household debts now account for 117 percent of income and nearly 75 percent of GNP, “levels that dwarf even mature economies” like the United States and the United Kingdom. The bank warns that the situation may get worse before it gets better—in part because there are still more than 1 million dajuing chaemuja, or consumers paying off credit cards with credit cards.
Only five years after the last crisis, South Korea faces a new one. This time the debtors are consumers, not corporations, but both crises involved an aggressive government drive to grow the economy through ultimately reckless lending, executed by slipshod banks. After South Korean regulators threw the reins off credit-card sales and use, finance companies began pushing cards on customers without even rudimentary credit checks. One government study shows that 27 percent of the homeless in Seoul now have credit cards. In other Asian markets—like Hong Kong and Japan, financial institutions have been “more prudent in lending money or issuing credit cards,” says Henry Morris at Industrial Research & Consulting in Seoul. Morgan Stanley found that “astonishingly,” South Korean issuers approved close to 100 percent of applicants, and warned that it’s not clear whether “this corporate culture has changed.”
The official response has only deepened the crisis. Regulators received warnings of mounting household debt as early as May 2001, but the expansion-minded Ministry of Finance and Economy pushed instead to boost consumption further, according to a recent report by a professor at Kyungsang University. In the absence of official restraint, Korea’s largest lender, Kookmin Bank, abruptly cut credit to delinquent cardholders in late 2002. Other banks followed, pulling back on credit cards and all household loans, in some cases demanding payment before loans were due, and throwing millions of families into turmoil.
Then late last year, authorities inadvertently switched course. The state-run Korea Asset Management Corp., created to resolve the bad-loans problem of the late ’90s, indicated that it might buy distressed household debt at as little as 30 percent of face value, which many consumers took as a sign that a bailout was coming. KAMCO withdrew the plan, but the damage was done, says Lim Choon Soo, head of research at Samsung Securities. Many households simply stopped paying their debts.
The number of South Koreans who are more than three months behind on payments is expected to rise from 3.7 million to 4 million by the end of 2004. That means 15 percent of the population is technically insolvent. Most are under 40—young people who used plastic to stock up on Gucci and Armani. The papers are full of tales of debt-induced divorce, suicide, bankrupt young women ending up in brothels. In December an unstable young man drowned his two small kids in the freezing Han River after quarreling with his wife over a $30,000 credit-card bill for their Christmas gifts. “The 1997 foreign-exchange crisis came and went rather quickly,” says Kyungsang University economist Kim Hong Bum. “But this household-debt crisis will haunt us for a long time, as it affects largely youngsters.”
In late 2002 Korean financial firms set up the Credit Counseling & Recovery Service, and its Seoul office is a window on the unfolding social tragedy. Visitors line up for four to five hours to meet a counselor. A bride-to-be asks whether she should cancel her marriage to save her fiance from financial woes. Many callers borrowed money to help indebted sons and daughters, and are now falling behind themselves, says CCRS spokesman Lee Dong Gi: “Just as Korean companies had a domino of bankruptcies [in 1998] because of their cross investments, Korean individuals face a domino of bankruptcies because of family supports.”
Officials say this crisis is more manageable than 1997-98, when South Korea had to go to the IMF for a humiliating $56 billion bailout. While it took a total of $140 billion to fix the bad corporate debts, bad household debt is much lower—about $30 billion, they say. Others aren’t so sure. “There were clear remedies for the old one—layoffs and corporate restructuring—but the current crisis doesn’t have quick solutions,” says Choi. “Delinquent individuals are already on the edge of the cliff. They cannot be pushed any further.” Cho Gyung Hee says that the credit-card companies still chase her daily, only now what they want is payment in full.
