House of cards
While the sub prime mortgage fiasco has been hogging headlines, the escalation of credit card debt has the potential to be another economic disaster
The big story of the week. Oil prices falling below $50 a barrel? Jobless figures hitting record highs? Or fears that deflation poses more of a threat to economies than inflation ever did?
None of the above ‘effects’ represent as great risk as that enduring ‘cause’, bad credit.
And it’s going to get worse. I know it, you know it and the consumers know it too. Not because they are still sitting on over priced mortgages, but because their credit cards have too much moveable debt.
The optimistic view (almost exclusive to Europe) is that just as long as everyone can keep moving the 0% around every 9 – 18 months all will be fine.
But there’s the problem. Time is running out.
The loan companies themselves are doing nothing to dispel the myth that cheap credit can outlast a pending recession. Maybe that’s why High Street spending is better than expected.
There are more than twice as many UK lenders offering 0 percent cards today then a year ago. And if anything, most lenders seem intent on dragging the pay back process out for as long as possible. But the signs are there that things are changing.
Most UK lenders have increased their interest rates on purchases since the summer, and balance transfer fees have steadily begun to climb to 3 percent. Watch those figures grow by at least 50 per cent next year, along with the introduction of new hidden costs.
A closer look at the monthly minimum repayments (MMR) hints at possible industry concerns. Lenders are reducing MMRs.
HBOS reduced its own MMR to just 1 percent last month, while 0 percent deals were wiped out by Capital One, Royal Bank of Scotland, NatWest and Citibank.
Optimistic analysts maintain the 0 percent rate has plenty of longevity and poses no imminent risk of being called in.
The pragmatic view sits squarely on the other side of the Atlantic, that window into the future that investors choose to ignore at their peril (keep watching those real estate prices in Florida).
A credit card crisis ‘is waiting in the wings’, said John Whitehead, former chairman of Goldman Sachs Group Inc and former U.S. Deputy Secretary of State under President Ronald Reagan, last week at a Reuters Summit.
"It's so similar to the mortgage situation that it's shocking when you think about it," he said.
A credit card collapse will cause unimaginable damage to the already fractured financial systems.
Americans alone ran up almost $1,000 billion in revolving consumer debt by the end of September.
Federal regulators only this month rejected a plan supported by the banking industry and a consumer group to ’forgive’ up to 40 percent of credit card debts for consumers.
The Office of the Comptroller of Currency (OCC) was asked to approve a test workout program that would help almost 50,000 people enrolled in debt management programs.
In rejecting the plan, the agency claimed: “The OCC does not consider any plan that defers the timely recognition of loss as prudent.”
How long before the world’s banks are reporting major losses on the next wave of debt. Unlike the sub prime market, this liability has little or no fixed asset attached.
The big story of the week? Stop the press for 2009 if they start calling it in.
