"Low Interest Rate Return Difficult... Han, Household and Corporate Debt Restructuring Needed"

Artif Mian "Preparing for Real Estate-Related Insolvency Risks"

There is a forecast that global interest rates will find it difficult to return to the low levels seen in the past. Accordingly, it was pointed out that companies need to effectively utilize debt to overcome growth slowdowns, and households must prepare for risks related to real estate-induced defaults and leverage expansion.

On the morning of the 22nd, the Korea Capital Market Institute held a 26th anniversary conference at Conrad Seoul in Yeongdeungpo-gu, Seoul, under the theme "Possibility of a Structural Shift in Interest Rate Trends and Private Debt." At the conference, Professor Atif Mian of Princeton University, author of "House of Debt" (2014), participated via video call.

In his keynote presentation, Professor Mian stated, "Countries like Korea and China experienced a rise in household debt from 2015 to 2021 that is not seen in other countries. This was an attempt to increase aggregate demand through household debt to respond to negative external issues," adding, "This will make Korea's monetary policy and interest rate hikes more difficult."

Professor Mian also emphasized, "What is important for both Korea and China is debt restructuring for a soft landing. It is necessary to avoid turmoil turning into a credit crisis as seen in other markets," and added, "For example, Korea needs to adopt a domestic debt restructuring strategy through bankruptcy-related regulations."

The attendees diagnosed that the possibility of global interest rates returning to the low levels of the past is low. Senior researchers Hyunju Kang, Inseok Baek, and Geunhyeok Jang of the Korea Capital Market Institute, in their first presentation titled "Assessment of the Possibility of a Structural Shift in Interest Rate Trends," predicted that the high interest rate trend will become entrenched due to rising real neutral interest rates and trend inflation. While the U.S. economy maintains high productivity, major advanced countries are experiencing expanding national debt and spreading deglobalization, which are pushing up neutral interest rates and trend inflation.

In particular, Korea's rapid aging was identified as the biggest problem. Aging offsets productivity improvements, causing the real neutral interest rate to stagnate, and the resulting decline in the working-age population may accelerate trend inflation. They stated, "Due to Korea's steep aging, the real neutral interest rate is stagnating at a low level, and inflationary pressures from a shortage of the working-age population will influence the interest rate trend," adding, "Therefore, more attention must be paid to managing already excessive household debt and government debt, which is expected to expand rapidly in the future."

In the subsequent presentations, risk response measures for households and others in the context of a sustained high interest rate environment were discussed. Korea's household debt-to-GDP ratio stood at 105% last year, a high level globally, and the concentration of real assets was also 63%, the highest among the top five countries with the highest household debt ratios, indicating vulnerability to interest rate and real estate price shocks.

Researcher Hyeyoung Jung noted, "Financial debt has increased more rapidly across households holding debt, and the proportion of over-indebted households has also risen significantly," adding, "Due to monetary tightening, interest burdens have rapidly increased since 2022, and if the high interest rate environment persists, there is a risk of increasing household defaults." Particularly, the fact that the intention to invest in real estate is still rising broadly among households and that leverage can expand through jeonse deposit loans, which are not subject to the debt service ratio (DSR) regulation, were identified as future risk factors for household debt.

Researcher Jung stated, "From a medium- to long-term perspective, gradual deleveraging of household debt should be pursued," and added, "It is necessary to curb excessive price rise expectations by securing the credibility of real estate policies and to prepare measures for jeonse deposit loans." He further emphasized, "It is important to recognize that the possibility of returning to the low interest rate environment of the past has significantly decreased," and "households should avoid taking on excessive risk in their use of debt."

Researcher Sangho Lee, who presented on "Concerns and Realities of High-Interest Debt in Listed Companies," pointed out that the possibility of corporate defaults expanding into systemic risk due to rising interest rates is low, but stressed the need for micro-level responses targeting vulnerable sectors such as real estate project financing (PF).

Lee also highlighted the need for companies to utilize debt efficiently to break away from the low-growth trend. Unlike U.S. S&P 500 companies, which drove profit growth and stock price increases through leverage expansion after the 2008 global financial crisis, Korean companies have focused only on managing debt stably.