Debt

Substantial Drop in Asian Shares

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Recent world events – New Zealand earthquake, Japan’s credit rating downgrade and continued Middle East and Libyan unrest – led to a significant drop in stock markets across Asia.  For example, South Korea’s Kospi, the Nikkei 225 stock and Hong Kong’s Hang Seng index all plummeted around 2 percent.  As well, Japan had trouble dealing with its huge debt following Moody’s Investors Service downgrading its outlook for the country’s credit rating, citing “increasing uncertainty” over Japan’s capacity to effectively deal with rising debt.  This doesn’t spell good news for the country which only last month had its sovereign debt rating cut by Standard & Poor.  Australia, China, Singapore and Taiwan are currently in the same boat vis-à-vis stock markets. The only good news for the region of late has been the increase in oil prices.

 

South Korean Economics

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If stock prices plummet and interest rates increase, South Korean households will suffer.  The Samsung Economic Research Institute (SERI)’s recent report showed a huge increase in individual debts, following the global financial crisis and a peak in loans.  But loans are not the answer since they are often based on the “floating interest rate system rather than fixed rates, which means debt levels rise when there is an increase in interest rates.” 


Figures show that South Koreans’ debts have basically increased at a steady pace in the last two years.  The government’s plan to help (debt-to-debt income ratio) is not a “proper” solution, according to the SERI report, which found that “the strict loan regulations should be regarded as part of policies to boost financial soundness of banks.”  While there has been a cap on this loan, in 2010 the government decided to raise this in an attempt to “revive the sluggish market.”  But because of the bullish stock market, assets and incomes are on the rise which has resulted in “an immediate household debt crisis.”


The report also predicted that if there is a 2% increase in interest rates, there will be an increase from 11.7 trillion to 16.1 trillion per quarter.  An increase in household debts will have to inevitably result in less spending money and thus a severe dent in the region’s economic growth.