A burdensome level of household debt is expected to pose a long-term threat to the Korean economy, a report said on Sunday.

The LG Economic Research Institute said that Korean households are increasingly faced with debt-related risks, citing the greater likelihood of debt not being repaid in time due to worsening conditions.

The report is based on an index that considers a range of elements, such as the repayment ability of households, interest payout and income levels. The index showed that local households’ risks began to soften in 2003, but jumped in 2008 when the country was hit by the global financial crisis.

The risk indicator spiked again in the third quarter of last year, reflecting the deepening of the eurozone fiscal debt crisis that shook investors’ confidence and put more pressure on households as banks turned more conservative in controlling lending to local households.

Korean households still face a slew of risks such as still-high real estate prices, the overcrowded small business sector run by cash-strapped retirees and a growing number of households who find themselves chronically unable to make ends meet, LG said.

The institute said that deleverage is a much-needed countermeasure that could reduce the risks in the long term, while policymakers should take steps to stabilize inflation growth and real estate prices.

Since June last year, the Korean government has been implementing a set of measures aimed at tightening household lending channels at commercial banks, but household debt continues to grow at a steady pace.

Last year, banks’ lending to households rose 5.7 percent, a relatively slow pace that reflected the financial regulators’ continued policy control. But the lending to households by financial institutions in the secondary market went up 9.9 percent as borrowers sought alternative channels after being turned down at banks.

The Korean economy, the fourth-largest in Asia, is forecast to see slower growth this year due to greater external risks such as the debt woes in Europe that might hurt the country’s exports.

By Yang Sung-jin (insight@heraldcorp.com)