Government’s “Overdraft” with Bank of Korea Nears ₩150 Trillion ($104B) – Record Signal of Fiscal Strain
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Date: September 8, 2025
Sources: Chosun Ilbo, Maeil Ilbo, JoongAng Daily, Korea Economic Daily, Munhwa Ilbo
Executive Summary
Between January and August 2025, the South Korean government borrowed a cumulative ₩145.5 trillion ($104B) from the Bank of Korea (BOK) through its temporary overdraft facility—informally described as a “minus account” (마통). This surpasses the previous record of ₩127.9 trillion ($91B) in the same period of 2024, a 13.8% increase.
Monthly borrowing highlights:
January: ₩5.7T ($4.1B)
February: ₩1.5T ($1.1B)
March: ₩40.5T ($28.9B)
April: ₩23.0T ($16.4B)
June: ₩17.9T ($12.8B)
July: ₩25.3T ($18.1B)
August: ₩31.6T ($22.6B)
The outstanding balance stood at ₩22.9T ($16.4B) at the end of August.
The 2026 national budget has been set at ₩728T ($520B), up 8.1% from the 2025 budget of ₩673.3T ($481B). To cover persistent shortfalls, the government plans to issue over ₩100T ($71.4B) in deficit bonds next year.
Five Laws of Epistemic Integrity
Truthfulness of Information
– Figures match official BOK disclosures to the National Assembly.
– Consistency with multiple media outlets.
Verdict: High.Source Referencing
– Data cited from Chosun Ilbo, Maeil Ilbo, JoongAng Daily, Korea Economic Daily, Munhwa Ilbo.
– Reliance on parliamentary disclosure adds weight.
Verdict: High.Reliability & Accuracy
– Numbers precise, but press coverage lacks detailed BOK statements on policy intent.
– Reliance on single-event data without mid-term fiscal projections.
Verdict: Moderate–High.Contextual Judgment
– Overdraft metaphor (“minus account”) aids accessibility but downplays structural fiscal deterioration.
– Articles largely omit implications for debt sustainability, credit ratings, or monetary independence.
Verdict: Partial.Inference Traceability
– Logical inference: growing overdraft use reflects chronic tax shortfalls.
– Absent: cross-country comparisons, IMF/OECD thresholds, or historical precedents (e.g., Japan’s 1990s debt spiral).
Verdict: Limited but traceable.
BBIU Opinion – South Korea’s Domestic Debt Spiral: From BOK Overdraft to Pension Capture
South Korea’s fiscal trajectory in 2025–2026 reveals a dangerous pattern: increasing reliance on the Bank of Korea’s overdraft facility (“한은 마통”), record issuance of deficit bonds, and creeping absorption of state debt by domestic financial institutions —including the National Pension Service (NPS). At the same time, the industrial base is eroding through the outflow of conglomerates toward the U.S. and the introduction of new regressive taxes (e.g., sugar tax) that shift the fiscal burden onto households.
While official yields remain artificially low (~2.8% for 10-year bonds), this masks a structural trap: interest payments already consume ~1% of GDP and are projected to rise to 1.3% in 2026, potentially doubling to 2–2.5% if yields normalize upward. The situation is reminiscent of Argentina’s decades-long cycle of monetization, pension fund capture, industrial flight, and regressive taxation.
Key Structural Factors
1. Chronic Fiscal Deficit
Tax revenue has consistently underperformed, reflecting weaker exports, slowing domestic demand, and demographic pressures.
Spending, however, is accelerating: the 2026 budget is set at ₩728T ($520B), up 8.1% year-on-year.
2. Monetization through BOK Overdraft
The government borrowed ₩145.5T ($104B) from the Bank of Korea between January and August 2025, surpassing all records.
This is not part of the consolidated debt stock, but it functions as de facto monetization of shortfalls, eroding confidence in fiscal discipline.
3. Rising Domestic Debt and Interest Costs
Public debt will reach ~₩1,250T ($890B) in 2026, ~55% of GDP.
Interest payments: ₩30T in 2025 (1% of GDP) → projected ₩36T in 2026 (1.2–1.3% of GDP).
If yields rise by +1–2%, the cost could climb to ₩50–60T (2–2.5% of GDP), crowding out productive spending.
4. Financial System Distortion
Domestic banks and insurers buy government bonds not for yield, but under regulatory and political pressure.
In effect, KTBs are an implicit tax on the financial system, draining capital from productive lending.
5. Pension Capture Risk
The National Pension Service (NPS), the world’s third-largest fund (~$700B), may be forced to absorb more low-yield KTBs if foreign investors reduce their exposure.
This would compromise returns and jeopardize intergenerational pension sustainability —an expropriation by stealth.
6. Industrial Erosion and Regressive Taxes
Chaebols are relocating capital and capacity to the U.S. (semiconductors, shipbuilding, defense), hollowing out the domestic tax base.
The government compensates with new consumption taxes (e.g., sugar tax), shifting the burden onto households and SMEs.
This marks the onset of fiscal extraction from below rather than taxation of productive surpluses.
Comparative Lens: The Argentine Parallel
The Korean case echoes Argentina’s trajectory:
Monetization of deficits (BOK overdraft ≈ Argentina’s central bank “adelantos transitorios”).
Pension fund capture (NPS as Korea’s version of ANSES).
Industrial exodus (chaebol shift to U.S. ≈ Argentine capital flight).
Regressive taxation (sugar tax ≈ Argentina’s “impuesto al cheque” or food levies).
Interest spiral (growing share of GDP consumed by debt service).
The difference is that Korea still has strong industrial champions and international credibility —but the structural logic of fiscal dependence is alarmingly similar.
BBIU Structured Opinion
South Korea is entering a domestic debt spiral with three reinforcing mechanisms:
Liquidity Monetization: reliance on the BOK overdraft to smooth deficits → signal of fiscal weakness.
Pension Capture: forced absorption of government bonds by NPS and domestic banks → erosion of future returns.
Regressive Taxation: new levies on consumption to replace eroding industrial revenues → social legitimacy cost.
This triad reflects a transition from a growth-based fiscal model to an extraction-based survival model. Symbolically, Korea risks becoming the first advanced Asian economy to mirror Argentina’s debt trap, albeit under different geopolitical conditions.
Annex – South Korea’s Fiscal Sustainability Outlook (2025–2028)
South Korea’s fiscal trajectory is under increasing scrutiny as domestic borrowing, reliance on Bank of Korea (BOK) overdrafts, expanding deficit bond issuance, and rising interest payments converge with structural industrial erosion and geopolitical commitments in U.S. dollars. This annex outlines a realistic projection through 2028, highlighting fiscal, social, and external risks.
The projection identifies three phases: (I) Containment and cost displacement (late 2025–mid 2026); (II) Composite stress and pre-electoral distortions (late 2026–mid 2027); (III) Forced normalization (late 2027–2028). The most likely outcome is recourse to an IMF program by 2027, triggered not by insolvency in KRW, but by a balance of payments crisis linked to dollar obligations.
Phase I — Containment and Cost Displacement (Q4 2025–H1 2026)
Debt-to-GDP ratio: ~51% → projected 54–55% following 2026 issuance.
Interest burden: ~1.2–1.3% of GDP (₩36T / US$26B).
KRW/USD: 1,390–1,500, with potential spikes above 1,520 under dollar strength.
10-year KTB yield: 2.8–3.4%.
Policy measures: expanded budget (₩728T / US$520B for 2026), introduction of new consumption-based taxes (e.g., sugar tax).
Social indicators: rising youth discontent (employment precarity, housing costs), but limited large-scale mobilization.
Risks:
External dollar shocks (oil, LNG, Fed policy).
Logistical/financial stress on LNG contracts.
Foreign capital outflows affecting KTB and equity markets.
Phase II — Composite Stress and Pre-Electoral Distortions (H2 2026–H1 2027)
KRW/USD: 1,500–1,650 as a de facto accepted band.
10-year KTB yield: 3.6–4.3% baseline; up to 4.8% in case of foreign sell-offs.
Interest burden: ~1.5–1.8% of GDP (₩48–50T / US$35–36B).
Domestic financial system:
Banks and insurers further constrained by forced absorption of KTBs.
National Pension Service (NPS) increases exposure to sovereign bonds, reducing long-term returns.
Crowding-out of private credit accelerates.
Fiscal strategy: broadened regressive taxation, continued social spending, increasing reliance on BOK liquidity.
Political dynamics: if electoral defeat looms, commitments are shifted forward, leaving unfunded liabilities and rigid contracts for the next administration.
Geoeconomic risks: U.S. retaliation through tariffs (autos, semiconductors) if Korea attempts to reinterpret or delay LNG purchase commitments.
Phase III — Forced Normalization (H2 2027–2028)
Trigger: depletion of usable reserves or sharp increase in USD hedging costs for corporates.
Adjustment mechanism: negotiation of an IMF program (stand-by or, less likely, Flexible Credit Line).
Projected conditions:
Multi-year fiscal consolidation path (return to primary surplus in 2–3 years).
Tax measures: higher VAT, elimination of exemptions, environmental levies.
Pension reform: NPS age thresholds, benefit formulas, and statutory caps on sovereign bond exposure.
Debt rule and prohibition of BOK overdraft financing.
Gradual release of domestic banks from mandatory KTB absorption.
More flexible KRW/USD regime with buffer-building in reserves.
Economic outcomes:
KRW stabilizes at a weaker baseline, with reduced volatility.
Bond yields decline as market confidence is restored.
Social cost at onset (higher taxes, reduced transfers), but medium-term stabilization.
Social and Political Sustainability
Youth demographic: rising frustration with high taxation, limited job prospects, and low pension expectations. Early signals of political awakening mirror trends in Argentina.
Legitimacy: erosion of confidence as citizens perceive higher debt with limited public benefit.
Protest risk: moderate in 2025, higher in 2026 as new taxes and rising import costs feed into household budgets, potentially escalating if paired with external trade shocks.
Political strategy: the current administration likely sustains policies until elections, leaving “time bombs” (commitments in USD, rigid spending mandates) for successors.
Early Warning Indicators
KRW/USD: persistent weekly closes above 1,520; sharp widening of forward premiums.
KTB 10y–UST 10y spread: unexplained widening, suggesting foreign exit.
NPS allocation shifts: sudden increases in sovereign bond holdings.
BOK balance sheet: expansion of sovereign debt holdings or aggressive USD swaps.
LNG contracts: delays, renegotiation signals, or volume adjustments.
U.S. tariffs: leaks or formal announcements targeting autos/EVs.
Strategic Options for a Successor Government
Establish a credible fiscal rule and phased consolidation plan.
Protect NPS autonomy and restrict forced bond absorption.
Restructure taxation toward neutrality: higher VAT with targeted rebates, reduction of regressive levies.
Hedge LNG contracts and diversify energy imports.
Redesign bilateral contracts with U.S. to include auditable flexibility clauses.
Free up banking balance sheets to restore productive lending.
Conclusion
South Korea faces a trajectory where domestic debt dynamics, industrial hollowing, and dollar obligations converge into a structural vulnerability. Current policies will likely sustain until the next election, at which point accumulated commitments will create acute fiscal and external stress. Unless corrective measures are adopted early, the baseline scenario is a recourse to IMF assistance by 2027, marking the shift from discretionary expansion to externally supervised stabilization.
