Business: Korea Goes Bust; The Asia-wide spread of credit-card culture is going disastrously wrong in only one country, South Korea, which faces its second debt crisis in five years.

Byline: B. J. Lee

Cho Gyung Hee says she sold her soul for a toothbrush. One summer day in 2000 the 30-year-old mother of two sons was accosted on a Seoul street by recruiters who offered her a free electric toothbrush if she would sign up for a credit card. She got the card on the strength of her verbal assurance that her husband had a job. Soon she had five more cards from other solicitors and was embarking--along with millions of other South Koreans--on a massive shopping binge, paying one card off with another. Now Cho is $20,000 in debt, can't afford a phone and is about to lose her electricity and water. By the time she and her husband sought relief last week at the new Credit Counseling and Recovery Center in Seoul, Cho was near bottom. "We thought about committing suicide several times because of the debts," she says. "I wish I never applied for the credit card."

That might be South Korea's motto now. While Asian nations from China to Thailand have recently introduced credit cards into consumer culture, only South Korea has seen this basically smart idea backfire spectacularly. The Asian currency crisis of 1997-98 showed that many of the region's economies were too reliant on foreign borrowing and foreign demand. They could not live by exports alone, and had to encourage a modern consumer shopping culture at home, too. That meant credit cards. But only South Korea tried to create a plastic-driven economy overnight.

Just months after the December peak of the '97-'98 crisis, Seoul phased out limits on credit-card cash advances, offered tax breaks for credit-card spending and later introduced a lottery for cardholders. Koreans took the bait, and surging credit-card spending drove up GNP growth to double digits in 1999 and 2000, until the debts came due. "Because of household spending, we enjoyed boom times when the rest of Asia was sluggish," says Choi Gong Pil at the Korea Institute of Finance. "Now Korea's economic growth is curbed by the household-debt problem, while other Asian nations are ready to boom."

A policy designed to boost consumption is now the chief drag on consumption. GNP growth fell to under 3 percent last year, and unemployment rose to nearly 4 percent as South Koreans struggled with the heaviest household debts in the world. A new report from Morgan Stanley says surging household debts now account for 117 percent of income and nearly 75 percent of GNP, "levels that dwarf even mature economies" like the United States and the United Kingdom. The bank warns that the situation may get worse before it gets better--in part because there are still more than 1 million dajuing chaemuja, or consumers paying off credit cards with credit cards.

Only five years after the last crisis, South Korea faces a new one. This time the debtors are consumers, not corporations, but both crises involved an aggressive government drive to grow the economy through ultimately reckless lending, executed by slipshod banks. After South Korean regulators threw the reins off credit-card sales and use, finance companies began pushing cards on customers without even rudimentary credit checks. One government study shows that 27 percent of the homeless in Seoul now have credit cards. In other Asian markets --like Hong Kong and Japan, financial institutions have been "more prudent in lending money or issuing credit cards," says Henry Morris at Industrial Research & Consulting in Seoul. Morgan Stanley found that "astonishingly," South Korean issuers approved close to 100 percent of applicants, and warned that it's not clear whether "this corporate culture has changed."

The official response has only deepened ...