190 Trillion Debt
Until recently, the possibility of an interest rate hike in the United States was expected to lead to two problems, one being capital outflow due to a narrower gap in the interest rate and the other being a rapid decrease in consumption attributable to a synchronized interest rate adjustment by Korea and the subsequent increase in household burdens regarding their principal and interest.
Now, the monetary stabilization bond (MSB) as a quasi-government debt amounting to 190 trillion won (US$171 billion) has emerged as a new variable. A rise in commercial interest rates cannot but lead to an increase in the MSB rate. Then, the interest burden on the Bank of Korea and the national economy as a whole may snowball.
According to the central bank, the MSB balance reached 188.7 trillion won (US$170.2 billion) last month, to set a new high for the third consecutive month. In addition, the amount increased by no less than 8.3 percent year-on-year and 2 percent from a month earlier. The balance is estimated to be close to 200 trillion won (US$180 billion) by the end of this year.
Such a rapid increase is because the foreign exchange authorities intervened in the currency market so as to block the appreciation of the won. It is said that the Korean government intervened in the market in April and May in particular, when the won-yen exchange rate moved near 900 won per 100 yen.
The catch is that an interest rate hike in the United States could result in a rise in the MSB rate and snowballing interest expenses. The interest is 2.8 trillion won (US$2.5 billion) a year when a benchmark interest rate of 1.5 percent is applied to the current MSB balance. When the interest rate goes up by one percentage point, the annual interest expenses increase to 4.7 trillion won (US$4.2 billion), which is equivalent to about half of Korea’s tax income shortfall for last year.