If thrift is an Asian virtue, then it is one that South Koreans are notably lacking: each adult has almost five credit cards on average and the household debt burden exceeds that of the United States before the subprime crisis.
With the growing risk of a global double-dip recession hitting exports from Asia's fourth largest economy, consumer spending has been key to economic growth.
But household borrowing has propped up that spending. With debt far above levels that triggered a credit card crisis eight years ago, it is now perhaps the biggest risk that Korea faces and one that the government is loath to tackle ahead of elections next year.
Alongside the mainstream banks, there has been robust growth from kerb market lenders. One even advertises that it will transfer funds after an 11-second procedure on a smartphone.
Official data shows that loans from these secondary lenders grew almost 10 percent in 2010 to 7.5 trillion won ($6.9 billion) as they tapped into insatiable demand from students, housewives and office workers.
Household debt is really serious and getting more so day by day, said Hong Hee-deok, a lawmaker with the opposition Democratic Labor Party.
Many people now have to borrow more to pay interest, and those who can't see their debt principle snowballing each day. If not dealt with quickly, I think this could cause troubles that may lead to another sovereign crisis, he said.
Private economists are not that worried. True, any talk of the high consumer indebtedness is a blast from the past for those familiar with the 2003 credit card crisis in which millions defaulted and the central bank was compelled to inject funds into a tense bond market.
But it is premature to anticipate a 2003-like endgame, said Frederic Neumann, co-head of Asian Economics Research at HSBC in Hong Kong. Should household debt growth remain high for a long time, this would inevitably raise risks for financial stability. But, for the time being, this is not on the horizon.
Korean household debt reached 155 percent of disposable income in 2010, exceeding the 138 percent recorded in the United States at the outset of the subprime crisis, said Erik Lueth, an economist at Royal Bank of Scotland in Hong Kong.
For some Koreans, the debt burden has already become unsustainable. Kim, a shoe polisher working in central Seoul who declined to give his first name, said credit troubles contributed to the failure of his marriage and he was struggling to pay off his debts.
One of my customers from Chohung Bank one day told me I can get a card easily and indeed came back later with a gold card issued for me. It was all because of the card that my life has collapsed thereafter, said Kim.
South Korea has been bitten by debt before. In 1997, heavy company borrowing triggered a near sovereign insolvency, but companies have cut debts close to 100 percent of equity from 425 percent at that time. The government also has strong finances.
Concerns that another global recession will hit exporters hard may also be overblown. Exports to the most vulnerable economies, the United States and Europe, have fallen to 25 percent of the total from nearly 40 percent in 1997 as Korean companies have tapped into fast-growing markets like China.
That leaves household debt as the biggest risk and, so far, government action has been muted.
It says the bulk of household debts are owed by rich people and relatively well covered with collateral, and points out that loans from banks or conventional financial institutions are relatively sound, with delinquency ratios staying below 1 percent for banks and below 2 percent for credit card loans.
In June, it asked lenders to cap overall lending growth below the nominal economic growth rate of around 7-8 percent annually, in addition to an earlier policy of limiting lending growth to below deposit growth.
The measures were not aimed at reducing the total amount of loans, but I think they were the best option available to the government to curb debt growth while minimizing the impact on economic growth, said Lee Sang-jae, chief economist at Hyundai Securities in Seoul.
Indeed, the heavy debt servicing burden at households has become the single biggest factor affecting economic and financial policymaking in South Korea.
The Bank of Korea's reluctance to raise rates lock-step with rising inflation seems to be directly related to the debt situation, either for fear it may trigger a wave of defaults or that it will rein in spending. A percentage point increase in interest rates could in theory take about $8 billion off Korean private consumption.
WE'VE BEEN HERE BEFORE
While Korea has won plaudits for its response to surging global capital flows and its leadership role in the Group of 20 nations' response to the fallout from the U.S. credit crisis, it appears to have forgotten lessons from financial meltdowns.
In the wake of the 1997-1998 Asian financial crisis, Seoul encouraged banks to issue as many credit cards as possible so as to boost consumer spending, and by 2002 the number of cards in circulation surged 2.7 times to 105 million.
By the time the inevitable crisis came, Koreans had an average 4.6 cards per adult and a whopping $100 billion in debt on them. The average ratio of debt to disposable income for households hit 108 percent in 2002, right before the credit card crisis broke out.
Millions of defaults ensued and the government was forced to step in and bail out the country's then largest issuer, LG Card.
Card ownership levels dropped to as low as 3.5 per adult in 2005, but have surged again to stand at nearly five per adult at the end of March this year, according to official data, as Koreans use them to pay for everything from coffee to luxury cars.
Household debt to disposable income is also significantly higher than the 130 percent recorded at the outset of Korea's credit card crisis in 2003, said Lueth at RBS.
DOUBLE ELECTION WITCHING
While the Korean authorities have been loud on rhetoric, room for action may be limited by elections next year and an economic slowdown as the ailing global economy crimps demand for exports.
For the first time in 20 years, the country will see parliamentary and presidential polls in the same year and rattled lawmakers from the ruling party have been sounding more populist as the votes near.
Frankly there's some chance lending regulations could face resistance when economic slowdown becomes a hot issue, said one economist at a brokerage house, who did not want be named due to the sensitivity of the issue.
($1 = 1083.850 Korean Won)
(Writing by David Chance; editing by Jonathan Hopfner and Vidya Ranganathan)