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Household debt issue will need a human touch

Aug 05. 2018
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By The Nation

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The Bank of Thailand needs to address ingrained bad habits and the myth of ‘too big to fail’

There are no fixed solutions to the problem of rising household debt, and any measure can backfire drastically. The concern of Bank of Thailand Governor Veerathai Santiprabhob warrants quick and effective measures to address the situation. Household debt has increased considerably – rising 49.14 per cent of gross domestic product annually on average from 1991 to 2017.

Household debt in Thailand increased to 68 per cent of GDP in the fourth quarter of 2017 from 67.9 per cent in the third quarter. The sharpest rise was 70.5 per cent, the lowest it’s been 25.4 per cent, back in 1991.

The notion that debt helps boost the economy is defied by the ignoble human tendencies to dishonour financial contracts, borrow unproductively and spend without discipline, and repay old debts by borrowing more money. Household debt nearly collapsed the world economy a decade ago. The crisis was largely blamed on the big banks and financial institutions, which led most ordinary citizens to assume the responsibility rested solely on elitist shoulders. While reckless creditors did deserve much of the blame, the borrowers played a no small part in the near-catastrophe.

In sounding an alarm bell, Veerathai noted that household debt, when it rises too high, can significantly disrupt the economy. It was a basic lesson in economics: Heavily indebted people might stop spending and in doing so threaten their creditors’ stability. Yet this lesson isn’t an easy one to learn for creditors or borrowers who are blinded by greed or despair.

Veerathai will have to include in his anxiety, expressed in a recent media interview, genuine concern for the man on the street. He will have to do no less that change historic habits and overcome the concept of the big financial players being “too big to fail”. 

These were the institutions that made fortunes peddling dubious financial packages to investors, creating and then bursting a bubble that caused immense damage globally, with taxpayers left to cover the costs and bail out the greedy and careless creditors. The refinancing plans that ensued gave top priority to the creditors’ wellbeing.

Of course, it takes bad creditors and bad borrowers to create an economic crisis. 

The difference is that the creditors get all the help and warnings and have all the connections. 

The plight of borrowers would rarely be addressed if the creditors weren’t so severely affected. People who pay more in “late fees” than the actual amounts owed, for example, would be left to their own devices had banks not begun complaining about non-performing loans.

The impact of household debt varies according to locale. Just a few years ago, Thailand’s household debt as a percentage of GDP was lower than it was in Denmark, Switzerland, Britain and the United States. And of course each country’s ability to cope with household debt is different.

Veerathai has to follow up on his concern with moral and practical measures that genuinely take Thailand’s true strengths and weaknesses into account. The big strength is that Thailand is an agricultural country, so it’s always more likely than other nations to have food on the table during a financial crisis. His influence on elements such as interest rates must be wielded with such facts in mind, and not primarily the wellbeing of those who are “too big to fail”.

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