🚨 South Korea Caught in Debt Trap: Household Debt Highest in OECD, Economic Growth at Risk

Today Korean Economic News | 2025.05.23

📌 South Korea Drowning in Debt While Banks Profit from High Interest

💬 South Korea has fallen into a 'debt trap' where private credit has crossed the critical threshold and is negatively affecting economic growth. Household debt has reached the highest level among OECD countries, and traditional monetary and fiscal policies have lost their effectiveness. Experts point out that reducing income inequality and implementing inclusive financial policies are urgent priorities. Household debt has reached 104% of GDP, ranking first among 38 OECD countries, and this is dragging down economic growth by 0.5 percentage points annually. Meanwhile, banks are recording their highest profits ever due to increased interest income from high rates, deepening economic inequality.

1️⃣ Simple Explanation

South Korea has been diagnosed as being caught in a 'debt swamp.' While citizens struggle with debt, banks are making money from high interest rates - creating a strange situation.

The term 'debt trap' might sound difficult, but simply put, it means a situation where there's so much debt that the economy can't function properly. It's like when a person has borrowed so much money that they can barely afford to pay just the monthly interest.

The numbers showing how serious South Korea's household debt is are quite shocking. A household debt-to-GDP ratio of 104% means that households owe more money than the country earns in an entire year. This is the highest level among OECD developed countries.

The problem is that this debt is blocking economic growth. Households are cutting spending to pay off debt, and companies are hesitating to invest, causing the entire economy to shrink. Experts warn that if this situation continues, economic growth will decrease by 0.5 percentage points every year.

Meanwhile, banks are enjoying boom times. Thanks to high interest rates, their loan interest income has surged, recording the highest profits ever. While citizens suffer from paying high interest, banks are making huge profits from that very interest - an ironic situation.

The biggest problem is that existing economic policies are losing their effectiveness. In the past, the government could stimulate the economy by adjusting interest rates or injecting money, but in a situation where there's already too much debt, these methods could actually be harmful.

Experts say that solving this problem requires a fundamental approach. They argue that we need to reduce income inequality and implement 'inclusive finance' policies that allow ordinary people to easily access financial services.

The current situation means we're not just dealing with individual debt problems, but standing at a critical crossroads where we need to change the entire structure of our country's economy.

2️⃣ Economic Terms

📕 Debt Trap

A debt trap means a situation where excessive debt actually hinders economic growth.

• When debt exceeds a certain level, consumption and investment shrink, negatively affecting economic growth.
• The International Monetary Fund (IMF) analyzes that when private credit exceeds 100% of GDP, it negatively impacts economic growth.
• South Korea has already crossed this critical threshold.

📕 Household Debt

Household debt means the total amount of money borrowed by individuals and households from banks and financial institutions.

• This includes mortgage loans, personal loans, credit card debt, etc.
• South Korea's household debt is 104% of GDP, the highest level among OECD countries.
• When household debt increases, spending power decreases, negatively affecting the domestic economy.

📕 Inclusive Finance

Inclusive finance means policies that allow disadvantaged groups to access financial services at reasonable costs.

• It helps low-income groups, young people, and small business owners easily get loans.
• It helps people get necessary funds without using high-interest private lending.
• It's a policy tool that contributes to reducing income inequality and economic stability.

📕 Private Credit

Private credit means the total amount of money borrowed by households and businesses from financial institutions.

• It includes both household debt and corporate debt.
• The higher the private credit-to-GDP ratio, the greater the risk to the financial system.
• Exceeding appropriate levels can cause financial crises and economic recession.

3️⃣ Analysis and Economic Outlook

✅ Causes of Rapid Household Debt Growth and Economic Impact

• Let's analyze the background behind South Korea's household debt reaching the highest level among OECD countries and its effects.

  • First, the surge in real estate prices is the main cause of rapid household debt growth. From 2020 to 2022, nationwide apartment prices rose by more than 30%, leading to a surge in loans for home purchases. Especially in Seoul and the metropolitan area, where housing prices jumped by more than 50%, young people had no choice but to take out excessive loans to buy homes. The government's real estate policies also lacked consistency, adding to market confusion. When loan regulations were tightened, people thought it was their last chance and borrowed even more money, creating a 'balloon effect.' Currently, mortgage loans account for about 75% of total household debt, so real estate market fluctuations have a huge impact on household finances.

  • Second, low interest rate policies encouraged debt growth. After the COVID-19 pandemic, the Bank of Korea lowered the base rate to 0.5%, significantly reducing borrowing costs. At that time, many people were caught up in the atmosphere of 'borrow money to invest' and increased loans to invest in real estate and stocks. The excessive leverage investment became so popular that the new term 'young-kkeul' (borrowing with your soul) was created. However, when rapid interest rate hikes began in 2022, interest burdens surged, causing many households to struggle. Households with variable rate loans saw their monthly interest payments increase 2-3 times, falling into a vicious cycle of cutting living expenses or taking additional loans.

  • Third, the surge in household debt is leading to reduced consumption and slower economic growth. High interest burdens have reduced households' disposable income, significantly shrinking spending power. According to Statistics Korea, household consumption expenditure growth slowed from 3.1% in 2023 to 1.8% in 2024. Consumption of durable goods and services decreased significantly, causing sharp drops in related industry sales. Self-employed business owners are also increasingly closing down due to declining sales and rent burdens. This creates a vicious cycle that weakens the entire economy's growth momentum by leading to job losses and income decline. The IMF analyzed that when private debt exceeds 100% of GDP, economic growth rates fall by 0.2-0.5 percentage points annually - exactly the situation South Korea faces.

• The household debt problem has become a structural risk factor threatening the sustainability of the entire national economy, beyond simple individual financial problems. With the limitations of real estate-centered investment practices and low interest rate-dependent growth models becoming apparent, we need a new economic paradigm.

✅ Banking Boom and Deepening Economic Polarization

• Let's examine the phenomenon of banks recording their highest profits ever due to high interest rates and its problems.

  • First, banks' interest income has surged due to interest rate hikes. Base rate increases starting in 2022 pushed market lending rates up to 6-7% annually. Meanwhile, deposit rates remained relatively low, significantly widening the spread between lending and deposit rates. Major commercial banks' 2024 net profits increased 20-30% compared to the previous year, reaching record highs. Interest income from mortgage loans and corporate loans especially surged. Banks are enjoying a 'have your cake and eat it too' situation as money they lent during the low interest rate era now brings higher returns with rising rates. This has led to rising bank stock prices and increased dividends, benefiting financial industry workers and shareholders.

  • Second, the suffering of ordinary people and the middle class contrasts sharply with banks' prosperity. While households cut consumption and save on living expenses due to high interest burdens, that very interest is converted into banks' profits - an ironic situation. Households with variable rate loans especially suffer extreme hardship as their monthly interest payments increase 2-3 times. Some households fall deeper into debt by taking additional loans due to insufficient living expenses or using high-interest private lending. Meanwhile, bank employees enjoy increased performance bonuses and stock dividend benefits, widening income gaps further. This phenomenon is becoming a factor that increases social dissatisfaction and conflict.

  • Third, banks' excessive profits raise questions about social responsibility. Banks are institutions with strong public characteristics as they operate based on citizens' deposits. Therefore, controversy arises over whether pursuing excessive profits is appropriate when the national economy is struggling. Some voices call for banks to return high profit rates to customers or fulfill their social responsibilities. Overseas, policies are being implemented to impose special taxes on banks' excessive profits or expand support for ordinary people's finances. South Korea also needs to explore ways to strengthen banks' social responsibility and reduce ordinary people's financial burdens. Financial authorities are encouraging banks to reduce excessive fees and increase people-friendly financial products, but questions remain about their effectiveness.

• Banks' boom symbolically shows South Korea's polarization problem. The financial system is criticized for working favorably only for certain groups, and this acts as a factor deepening social conflict and economic inequality.

✅ Policy Effectiveness Loss and Need for New Approaches

• Let's analyze the limitations of existing economic policies and the need for new solutions.

  • First, traditional monetary and fiscal policies are losing their effectiveness. In the past, when the economy was bad, interest rates could be lowered or the government could inject money to stimulate the economy. However, in the current situation where debt has already accumulated excessively, lowering interest rates would only encourage more debt without substantial economic recovery effects. Government fiscal investment also has limitations given the already high government debt. A bigger problem is that interest rate cuts could lead to asset price increases, further worsening inequality. This situation is called a 'policy dilemma' - where any policy used will have significant side effects. Central banks and governments face the difficult task of finding new policy tools and approaches.

  • Second, reducing income inequality is the key to solving the debt problem. One fundamental cause of surging debt is that asset price increases outpaced income growth. Especially young people and the middle class had no choice but to rely on excessive loans because buying homes was difficult with regular income alone. Therefore, to fundamentally solve the debt problem, policies are needed to reduce income inequality and increase real income. We need to increase ordinary people's income through minimum wage increases, improved treatment for irregular workers, and wage support for small and medium enterprises. We also need to suppress excessive asset price increases and increase housing supply to stabilize housing prices. If these policies succeed, people can live stable lives without relying on debt.

  • Third, inclusive financial policies and financial system reform are urgent. The current financial system lends at low rates to people with high credit scores while imposing high rates on those with low credit scores. This is a factor that further deepens inequality. The government is expanding policy finance so ordinary people can obtain funds under reasonable conditions. Examples include low-interest loans through the Korea Federation of Banks, guarantee support through credit guarantee funds, and expansion of financial products for ordinary people like Sunshine Loans. It's also important to improve credit evaluation methods using digital financial technology and introduce new credit evaluation models using alternative data. This will allow groups previously excluded from the existing financial system to access financial services.

• To escape the debt trap, we need to fundamentally change existing growth models and policy paradigms. We need to shift from quantitative growth to qualitative growth, from policies that deepen inequality to policies pursuing inclusive growth.

4️⃣ Conclusion

The diagnosis that South Korea has fallen into a 'debt trap' means our economy stands at a fundamental turning point. With household debt reaching the highest level among OECD countries and existing policy tools losing effectiveness, we must explore new economic paradigms.

This problem cannot be solved simply by individuals reducing their debt. It's a social problem where real estate-centered investment practices, deepening income inequality, and structural problems in the financial system are complexly intertwined. Especially the reality of banks recording their highest profits ever based on ordinary people's suffering starkly reveals our society's inequality problems.

Solutions exist. But the path is not easy. We need comprehensive approaches to reduce income inequality, expand inclusive financial policies, and stabilize the real estate market. The government must focus on policies that increase ordinary people's real income and improve financial accessibility. Banks also need to fulfill their social responsibilities and make efforts to return excessive profits to society.

Above all, individuals also need wise financial management. We should avoid excessive investment or loans and develop habits of living within stable income ranges. We should actively utilize government financial support systems for ordinary people and avoid using high-interest private lending as much as possible.

The debt trap is a crisis, but it's also an opportunity to transform our economy into a healthier and more sustainable structure. If all economic actors pool their wisdom together to overcome this crisis, we can build a more fair and inclusive economic system.