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Asset bubbles could trigger systemic risks
Korea, like most other industrialized countries, is struggling with excess liquidity amid the COVID-19 pandemic. The country's money supply, as measured by M2, amounted to about 3,101 trillion won ($2.75 trillion) as of Aug. 31, up 9.5 percent from a year ago. This represents an increase of over 9 percent for five months in a row since April. Household loans soared by 9.6 trillion won in September after posting the biggest rise in August.
In a recent financial forum, Financial Services Commission Chairman Eun Sung-soo underscored the need to brace for "tapering," the gradual reversal of a quantitative easing policy, to guide the country to an orderly exit from the increased liquidity. He appears to have meant that a proactive exit plan is needed to minimize the side effects of asset bubbles from the coronavirus-caused liquidity expansion.
Nonetheless, the government is doing nothing to put the brakes on the ominous trend, overwhelmed by the COVID-19 scare. Default rates on household loans are on the rise and marginal companies keep growing. In fact, nearly four out of 10 companies can hardly afford to pay the interest on their debt with their operating income.
The biggest question is that the liquidity-fueled rally cannot last forever. Monetary easing remains intact to cope with the devastating impact of COVID-19, but there is no other way other than curbing liquidity. A rise in market interest rates has already reflected this trend. The COFIX, a benchmark rate for home-backed loans, turned around in 10 months, raising fears that the pace of interest rate increases could quicken if tapering is fully adopted.
The government should seriously think about achieving a soft landing to cushion the shock of inevitable tapering. Our economy may confront greater-than-expected systemic risks if we are caught flat-footed by a liquidity cut. It's imperative to let more funds flow into productive areas through bold deregulation. Failing to keep the bubbles from bursting will certainly throw the country into a new crisis even after COVID-19 is over.
