Global Speculators Target South Korea, Where Household Debt Surges

In the past, global speculators have routinely looked for a scapegoat when the United States emerged from an economic crisis. When the U.S economy recovers, the market makes a “money move,” in which the flow of money changes. Global speculators look for this opportunity to make money.

In 2010, when the U.S. economy was on the rise after the 2008 global financial crisis, the acronym “PIIGS” began to spread in the global financial community. Originally, “PIGS” was coined in the 1970s as a pejorative acronym referring to Portugal, Italy, Greece and Spain. Later, Ireland was added, and the abbreviation referred to those countries in fiscal crisis that had been handling their finances with money from other countries. In the end, speculators attacked these countries, causing their treasury bond rates to increase and leading to a chaotic market collapse. Greece, Ireland and Portugal even received bailouts.

As the European debt crisis subsided, the term “Fragile Five” spread across the global financial community. In 2013, investment bank Morgan Stanley classified five countries with large current account deficits — Brazil, Indonesia, India, Turkey and South Africa — as countries with weak currencies. At the time, Federal Reserve Chairman Ben Bernanke said that as the U.S. economy recovered, he would start tapering to reduce the release of money in 2014. When foreign funds were withdrawn in these five countries, the currency value fell and stock prices plummeted.

Whenever a global crisis breaks out, South Korea is referred to as the “global ATM.” This is because foreigners can easily withdraw money due to South Korea’s high level of dependence on trade. Despite this fact, South Korea avoided being scapegoated twice in 2010 and 2013. It has accumulated a great amount of foreign cash reserves and reduced short-term debt since the Asian and global financial crises. The government also took measures to prevent excessive inflow of overseas speculative funds, calling its strategy the “three sets of macroprudential measures.”

The U.S. economy is now on track to recovery. Fed Chairman Jay Powell said that in November, he would end the emergency measures that were implemented in response to the COVID-19 crisis and start tapering. It is time for global speculators to find a scapegoat once again. It is difficult to know what standards they will apply in advance. However, each crisis comes with a different face.

The most vulnerable part of the Korean economy is mounting household debt. The Wall Street Journal already named South Korea as one of the 10 countries most vulnerable to household debt as of Feb. 2018, noting that the growth of household debt in South Korea and Norway is particularly high.

However, South Korea has made matters worse instead of reinforcing any weaknesses. While the government created a real estate policy to prevent speculation, it only drove young people into panic buying. As the interest rate was drastically lowered due to the COVID-19 crisis, the government neglected to come up with measures allowing money to flow into the innovative economy sector. As a result, the household debt-to-gross domestic product ratio was 105% in the first quarter, up 13.2 percentage points in two years. It is the third largest increase after Hong Kong and Norway. If speculators group countries vulnerable to household debt together as targets, South Korea will not be left out.

One of the most popular phrases on Wall Street lately is “party hard, but dance near the exit.” It means that we should prepare for the end of the U.S. money-lending season. By taking stopgap measures as our economic officials do now, South Korea will easily become the target of global speculation. Recently, the government stepped forward to reduce household debt, but it is now too late, as the horses are out of the barn. We hope that the next administration’s economic team will implement a policy to reinforce weaknesses in advance.