Rising household debt and trouble-laden savings banks pose a threat to Korea’s financial sector, which has long been protected and pampered by government-led bailouts and injections of public funds, analysts said Tuesday.
The country’s banks and other financial companies confront a toxic mix of slower global growth and the protracted sovereign debt crisis in Europe, a precarious situation that could potentially increase the chance of bankruptcies here.
“Banks handle a lot of loan-related businesses, and problems with the real economy tend to increase the number of people who fail to honor their debts in time,” said Suh Jeong-ho, analyst at Korea Institute of Finance.
“Financial firms that invested heavily in stocks and bonds could face troubles when the broader market continues to falter.”
The outlook remains grim. The eurozone debt problem, though the risk factor is widely believed to have been factored in the market prices, is dampening the investment sentiment in the financial market in Korea and elsewhere, while the country’s real economy is also witnessing slower export growth and lackluster domestic spending.
Big financial companies with sizable cash reserves could weather the current downturn relatively safely, but small firms, including the savings banks hit by suspension orders, might suffer a serious setback, illustrating the new reality that the financial sector no longer enjoys protection from risks.
“The overall economy is expected to worsen this year compared with last year, and household debt is also on the rise, which can turn into troubled assets at major financial companies,” said Lee Chang-seon, analyst of LG Economic Research Institute.
Household debt, which has already passed 900 trillion won ($775 billion), is driving more people to credit delinquency, according to credit rating agencies. Alarmed by the rising debt level, the financial regulators asked local lenders to refrain from extending new household loans, but the demand for new loans has remained strong, and new loans extended by non-bank financial firms rose sharply late last year.
