Lee Jae-myung, the Democratic Party of Korea presidential candidate, announced the 'debt repayment on behalf' policy. There are six policies related to debt adjustment and cancellation specified in the policy booklet. The aim is to alleviate the liability burden on ordinary citizens, especially self-employed individuals, amid the economic downturn. However, active debt cancellation poses a concern for a 'moral hazard' and may set a policy precedent that stimulates the depletion of national finances.
According to the political circle on the 1st, the Democratic Party's policy booklet for the 21st presidential election includes six policies related to debt adjustment and cancellation. ▲Drastic measures for COVID-19 loan debt adjustment and cancellation ▲Reduction of interest burden by expanding the small business interest support project ▲Easing eligibility and expanding the scope of beneficiaries for the New Start Fund ▲Deferral of loan principal repayment upon self-employed business closure ▲Establishment of a bad bank for long-term small delinquent debt write-offs ▲Expansion of liquidation-type debt adjustment application.
The policies proposed by the Democratic Party focus on reducing the debt burden for small business owners and self-employed individuals. Both the COVID-19 loans and the New Start Fund provide financial support to self-employed individuals who suffered a revenue hit during the pandemic. The government provided these individuals with COVID-19 loans at low interest rates through the Industrial Bank of Korea and the Credit Guarantee Fund. The New Start Fund is a policy aimed at reducing up to 80% of the loan principal for self-employed individuals who have defaulted for more than three months or went out of business while repaying their loans. The Democratic Party's pledge aims to broaden the range of beneficiaries of the current financial support and expand the scope of debt adjustment.
Bad banks and liquidation-type debt adjustment are policies aimed at completely eliminating remaining household debt. A bad bank is a financial institution that buys and manages the disposal of non-performing loans. The Democratic Party's policy booklet includes the formation of a large-scale fund to temporarily purchase and write off non-performing loans from private financial firms. It also pledges to broaden liquidation-type debt adjustment through special exemption systems or repayment deferral systems. Both policies are intended to relieve the debt burden of economically vulnerable groups by having the government repay the outstanding balances of small loans for low-income individuals.
The Democratic Party approaches debt adjustment and cancellation policies as financial support with a welfare aspect. In the policy booklet, the Democratic Party explained the intent by stating, 'We will ease the burden on households and small business owners and revitalize the domestic economy.' The party believes that if the debt burden on self-employed individuals is reduced, the domestic economy will revive. According to the Financial Supervisory Service (FSS), the arrears rate for bank loans to individual business owners at the end of this year is 0.71%, up 0.17 percentage points from 0.54% a year ago.
The cause for concern is the abuse of the policy. Debt adjustment and cancellation policies carry the possibility of a 'moral hazard.' As the government pays off individual debts, it may instill the incorrect perception that 'there is no worry about debt because the country will repay it.' Such moral hazard can stimulate a mindset of reliance solely on government financial support, while losing economic power. According to academic circles, Korea is the only major advanced country implementing a policy of personal debt cancellation through government finances.
Experts advise designing the policy to prevent the abuse of debt adjustment and cancellation. Kim Sang-bong, a professor of economics at Hanyang University, said, 'Instead of having the government repay all self-employed individuals' debts, debt adjustment and cancellation should be implemented from the perspective of providing an exit for zombie self-employed businesses.' Professor Kim added, 'To prevent moral hazard, the scope of debt adjustment should be limited to self-employed individuals who have gone out of business, while giving those borrowing money only one chance.'