The government will forgive the 16 trillion won owed by 1.13 million long-term borrowers in arrears. While similar 'debt forgiveness' policies have existed in previous administrations, this marks the largest scale of debt adjustment. The Moon Jae-in administration also implemented a policy to eliminate 100% of the debts of long-term borrowers, with the projected amount for debt adjustment at about 6 trillion won at that time.
The issue is funding. The government plans to inject 400 billion won in finances and receive 400 billion won in contributions from banks and other financial institutions. There is significant criticism of using financial resources for personal debt forgiveness as well as pressuring financial institutions to contribute funds under the guise of 'coexistence.' The controversy over 'moral hazard' is also likely to resurface.
On the 19th, the government announced the 'Long-term Arrears Debt Adjustment Program.' The debt forgiveness for COVID-19 is one of President Lee Jae-myung's key promises. The support targets individuals (including self-employed) who have been in arrears for over seven years with debts of up to 50 million won. If they have no assets available for disposal under '60% of median income,' their arrears will be entirely written off, meaning their debt will be eliminated by 100%. Additionally, for borrowers deemed to be severely lacking in repayment ability, the principle will be reduced by up to 80%, and debt adjustments will allow for repayment in installments over ten years.
Previous administrations also had similar debt forgiveness policies. In 2008, former President Lee Myung-bak promised a '720 million credit amnesty' during his presidential campaign. The key aspects included providing interest relief on debts for those with low credit ratings and erasing the arrears record of those classified as credit delinquents. The Park Geun-hye administration created a 'National Happiness Fund' in 2013, which reduced debts by up to 50% (and up to 70% for basic livelihood recipients).
The Moon Jae-in administration pushed for a plan to forgive the debts of long-term borrowers in arrears by 100%. The target group consists of individual borrowers with debts of up to 10 million won who have been in arrears for more than ten years, estimated to number around 1.59 million individuals (with debts totaling about 6.2 trillion won). The Yoon Suk-yeol administration also established the 'New Start Fund' to relieve the debts of small businesses affected by COVID-19.
Previous administrations mostly created funds to conduct debt adjustments. The Lee Myung-bak administration used the 'Credit Recovery Fund,' while the Park Geun-hye and Moon Jae-in administrations utilized the 'National Happiness Fund.' The Yoon Suk-yeol administration is also planning to establish a new fund in the nature of a 'bad bank.' A bad bank is a method of restructuring that takes over and resolves non-performing assets. The bad bank of the Lee Jae-myung administration is expected to execute its policies more quickly, as long-term borrowers will not directly request 'debt adjustments' but rather, the bad bank will enter into agreements with financial institutions to 'bulk purchase' the arrears.
The bad bank is projected to receive funding of 800 billion won. Of this, 400 billion won will be allocated through the secondary supplementary budget, while the remaining 400 billion won will be covered after negotiations with the financial sector. A bank official noted, 'A significant portion of the policy could fall on the banks, and additional contribution requests are expected.' Kim Jin-il, a professor of economics at Korea University, stated, 'Government finances must be executed without issues of equity, but care is needed when supporting only individuals who meet certain conditions.'
The controversy over moral hazard is also recurring. It could create a moral hazard where 'those in difficulty do not have to repay the money they borrowed,' leading to reverse discrimination against diligent debtors who consistently repay their principal. Oh Yun-hae, a researcher at the Korea Development Institute (KDI), commented on the debt forgiveness policies, 'There is a possibility that the debtor's willingness to repay will weaken and moral hazards will occur,' adding that 'debtors may neglect their efforts to avoid bankruptcy or debt repayment, which could negatively impact other diligent debtors.'