The government has decided to broaden the range of loans the New Leap Fund can buy, extending debt forgiveness to borrowers who fell out of earlier restructuring programs after their finances deteriorated while they were repaying. Offering another chance to people who have already been through a workout for small delinquent debts is likely to raise questions about fairness and moral hazard. The change in criteria is expected to require the fund to purchase up to 1 trillion won ($720 million) in additional loans. Through the end of July this year, the New Leap Fund had already bought 11.74 trillion won worth of long-term delinquent debt in six rounds, or 72% of the total the government had projected. With the expansion of the New Leap Fund and other policy programs, the debt ratio of the Korea Asset Management Corp. is expected to climb to 351.6% by the end of this year. That leaves the public sector shouldering a heavier financial burden.
There is a case for giving a fresh start to vulnerable households trapped in debt for years and to small business owners and the self-employed hit by shocks such as the COVID-19 pandemic. But critics argue that debt forgiveness programs, repeated with each change of government, undermine credit discipline and treat borrowers who have faithfully repaid unfairly. Of the 2.928 million people who had their credit records restored last year after paying off small delinquent debts in full, 483,000, or 16.5%, fell behind on payments again in the first quarter of this year. That reflects a combination of tighter lending standards at financial institutions and the weaker repayment capacity of vulnerable borrowers, but it is hard to rule out the possibility that repeated write-downs have sent the wrong signal — that holding out will get debts reduced. If financial companies pull back on lending out of concern over losses, vulnerable households will be pushed toward illegal private lenders.
If debt restructuring is to provide a foothold for recovery and revive economic vitality, one-off debt forgiveness must be paired with restructuring among small business owners and the self-employed. For those pushed to the brink by weak consumption, high prices and high interest rates, writing off debt alone is no more than a stopgap. The government should strengthen vocational training and employment support so that marginal self-employed business owners who have lost their competitiveness can move into wage jobs, and it should encourage companies to create jobs. Voluntary debt restructuring and turnaround support by private financial companies should also be expanded. Only by shifting the focus of policy from erasing debt to building borrowers' capacity to repay it themselves can this vicious cycle be broken.
