[Reporter’s Notebook] 90% Debt Forgiveness... Financial Services Commission Leading Moral Hazard

[Asia Economy Reporter Song Seung-seop] Until the International Monetary Fund (IMF) crisis, large corporations in Korea never felt the risk of going bankrupt. There was a belief that even if they borrowed heavily and failed, the government would mobilize banks to save them. The anecdote of Jeong Tae-su, chairman of Hanbo Group, shouting "Just try it" to a bank president who said he could no longer lend money clearly illustrates the moral hazard of that time.

The Financial Services Commission announced yesterday that it will support the repayment of COVID-19 loans for small business owners. If repayment ability is low, a grace period of 1 to 3 years will be granted, and high interest rates will be lowered to a medium credit level considering the interest burden. The plan also includes forgiving 60-90% of the principal on credit debts for delinquent borrowers.

The Financial Services Commission has made diligent debtors, who consistently repaid their debts despite enduring severe pain during the economic recession, look like fools. Those who had spare funds but did not repay and remained indifferent have benefited. Although there have been strong demands for financial support from the political sphere, this measure is a bad policy in that it benefits a few immoral individuals over the majority of honest citizens.

This is not to ignore the special circumstances of COVID-19. It is a policy that helps self-employed people struggling with debt due to the national economic crisis. However, alternatives that improve repayment ability should come first. Interest rate reductions or principal forgiveness should be subsequent measures. Providing support that wipes out most of the principal for delinquent borrowers is inappropriate.

After all, someone has to repay the money. Milton Friedman described economics as "there is no such thing as a free lunch." Forgiveness is also funded through raising funds. Whether by pressuring banks to divert existing budgets or by the state borrowing money, it costs money. Citizens who did not take out loans must bear the burden directly or indirectly.

Moral hazard is an even bigger problem. Moral hazard begins with repetitive practices. A society where the belief that the country will somehow solve problems during every crisis becomes widespread is extremely dangerous. The fundamental market principle that "I am responsible for my actions" is undermined.

Many citizens of the Republic of Korea believe they are moral. There probably is no borrower who intends to take on massive debt and declare bankruptcy immediately. However, if moral hazard becomes widespread in Korea in the future and the country faces a crisis, it should be remembered that the Financial Services Commission, pushed by the political sphere, laid the groundwork for it.