South Korea Debtor Bail Out Plan

South Korea’s incoming government is planning a huge bail-out covering 7.2m consumer debtors behind on loan repayments or with poor credit ratings in an effort to spur consumption and prevent a repeat of a 2004 consumer credit crisis.

President-elect Lee Myung-bak, an ex-Hyundai executive, promised help for consumer debtors during the campaign leading up to last month’s presidential election. Economists have warned that South Korean households and small companies are facing a growing risk of default amid rising interest rates and a credit squeeze at the country’s banks.

But South Korea’s top financial regulator, the Financial Supervisory Commission, took things a step forward on Thursday when it outlined a bail-out plan to Mr Lee’s transition team.

Under the plan, credit delinquents with a small amount of debt will have their interest payments reduced and repayment deadlines extended. Their credit records will also be cleared.

Chang Su-man, a member of the transition team’s economic subcommittee, said the timing and the details of the plan have not yet been decided and it still required extensive discussions.

“There is no exact data about how much it will cost, but the plan will be implemented because it is one of Mr Lee’s main campaign promises,” Mr Chang said.

Local newspapers said the planned measures could cost the government about $11bn. Mr Chang declined to confirm that, but pointed out that that would be a small amount given that Seoul has spent $179bn to bail out struggling financial institutions and companies since the 1997-98 Asian financial crisis.

The number of South Korean credit delinquents has fallen significantly since the government rescued about 1m debtors in 2004 after the bursting of a credit card bubble left banks with bad debts.

Debtors with more than Won500,000 ($534) owed and more than three months behind on their payments stood at 2.7m at the end of June, down from a peak of 3.72m in 2003. But, according to finance ministry figures, some 7m South Koreans with poor credit ratings also owe about Won18,000bn in total.

Critics said the forthcoming plan could cause serious moral hazard and hurt the country’s banks, although Lim Ji-won, an economist at JPMorgan, called it a “pre-emptive” measure as the number of defaults was likely to rise with interest rates.