The long-term interest rate shock originating from the United States is putting pressure on South Korea's economy, which is grappling with over 2,000 trillion won in household debt and significant corporate refinancing burdens. As domestic government bond rates soar, corporate and bank bond rates are also rising, with mortgage rates approaching 7% again. Prolonged interest rate increases could not only suppress household consumption and business investment but also exacerbate vulnerabilities in sectors such as small businesses, marginal firms, and real estate project financing.
According to the financial sector on August 20, the balance of household credit at the end of the second quarter reached 1,979.8 trillion won, surpassing 2,000 trillion won for the first time. This marks an increase of 25.9 trillion won over three months, the largest rise in nearly four years since the third quarter of 2021. The increase in loans related to housing, as well as other loans such as credit loans, has heightened the sensitivity of households to interest rates.
Corporations and real estate project financing (PF) are also facing the burden of high interest rates. According to the Korea Securities Depository, the amount of corporate bonds maturing between September and December is expected to reach 22.3 trillion won. The delinquency rate for PF loans rose to 4.65% at the end of March, an increase of 0.77 percentage points from the previous quarter, with 16.4 trillion won classified as having significant or potential credit risk. If interest rates rise again, households and businesses already burdened with debt, as well as PF projects, will likely feel the impact more acutely.
In this context, rising interest rates from the U.S. are pushing domestic financial costs higher. On August 18, the yield on the U.S. 30-year Treasury bond exceeded 5.3%, reaching its highest level in 19 years. This surge is attributed to the U.S. national debt surpassing $40 trillion for the first time, alongside fiscal pressures, increased Treasury supply, and inflation uncertainties.
The shock quickly spread to the domestic bond market. The yield on South Korea's 30-year government bonds reached 4.751% on August 18, the highest since their first issuance in 2012. On that morning, the 30-year bond yield was 4.698%, while the 10-year bond yield stood at 4.335%. As government bond yields rise, the rates at which companies can actually secure funding are also increasing.
On that day, the yield on AA- rated three-year corporate bonds was 4.505%, up about 1.6 percentage points from the 2.9% range a year earlier. This increase is not solely a reflection of rising government bond yields. The yield on three-year government bonds was 3.816%, resulting in a credit spread of 68.9 basis points (1 basis point = 0.01 percentage points) between the AA- rated three-year corporate bonds and government bonds. This indicates that additional costs are being added due to rising government bond yields and increased corporate credit risk.
Companies that issued corporate bonds at interest rates of 2-3% during the low-rate period now face the possibility of refinancing at rates exceeding 4% as their bonds mature. While financially strong companies with sufficient operating profits can withstand this, those with high debt reliance or lower credit ratings may see increased interest costs lead to reduced investment and employment. Companies in worse financial situations may even find it difficult to refinance their corporate bonds.
Households are also feeling the impact. The key benchmark rate for fixed-rate mortgage loans, the five-year financial bond yield, rose to 4.3967%, significantly higher than the same period last year. The fixed-rate mortgage rates at the four major banks (KB Kookmin, Shinhan, Hana, and Woori) have climbed to between 5.07% and 6.37%, with the upper end nearing 7%. If the rise in financial bonds continues, the burden on borrowers seeking new loans or having their rates reassessed will increase.
With household debt exceeding 2,000 trillion won, even slight movements in interest rates can have a significant impact on the overall economy. Households that must allocate more income to interest payments will reduce consumption, while companies facing increased financial costs will cut back on investment and hiring. Small business owners, who are already relying on debt to cover operating costs amid declining sales, and marginal firms that struggle to cover even interest payments with operating profits are particularly vulnerable to rising interest rates. Additionally, as financial costs increase, the viability of less profitable PF projects may become even more challenging.
Kim Dae-jong, a professor at Sejong University’s Business School, stated, "Even a 0.5 to 1 percentage point increase in interest rates could impose hundreds of thousands of won in additional interest burdens on households with large loans. This money will not be used for consumption, which could negatively impact the economy."
* This article has been translated by AI.
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