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UK INDEBTEDNESS - ECRC gets a mention in the press in an article dealing with differences in credit cultures in the UK when compared with Europe, and the need for appropriate regulation.

(International Herald Tribune, by Matthew Saltmarsh, October 26, 2007)

Clare Silver, 37, is one of millions of Britons who have ended up on the wrong end of the easy credit culture that has become part of that country's financial landscape.

A few years back, Silver, then a manager of a bank call center, had used up her quota of preferential loans associated with her job and started filling out the credit card offers that were coming into her mailbox almost daily.

She said she used the cards initially to buy "frivolous stuff," like consumer goods and accessories. But as the debt stacked up, and introductory offers expired, she became locked in a vicious cycle; more cards and loans were needed - and available - to pay off other debt.

Things came to a crunch when Silver returned from vacation last year to three weeks of unpaid bills. "I felt sick as a dog," she said. She couldn't sleep with worry, confessed to her partner and took leave from work, during which time she negotiated an arrangement with her creditors to pay them a percentage and keep out of bankruptcy. She subsequently left the bank and now works for Myvesta, a not-for-profit debt counseling organization.

Since the summer, conditions in world credit markets have been grabbing headlines as the subprime mortgage crisis that started in the United States has brought stagnation to the interbank market that oils the wheels of the global lending machine. That, in turn, is starting to squeeze consumers worldwide, and there is concern this autumn that consumer spending is slackening.

Events like the run last month on the British thrift Northern Rock and the problems at some U.S. mortgage lenders are creating concern that the long economic upturn in the Anglo-Saxon economies is vulnerable. If there is a consumer-led downturn, policy makers will have to reflect on whether the model - partly based on easy credit - that has driven growth for so many years is sustainable.

It has long been thought that a competitive and liberal credit market was best for consumers and industry. But more voices are suggesting now that consumers in countries where credit conditions have been tightest will emerge in better shape when the crisis is over. There are also fears among some in countries where credit is relatively restricted that opening the floodgates will bring unwanted societal and economic effects.

"Credit is good. It needs to do good," said Udo Reifner, a professor of law and economics at the University of Hamburg. "But credit needs to be supervised."

The issue is more pressing in Europe and the United States, as many Asian economies are experiencing robust growth and indebteness tends to be lower, often because of the stronger role of the family and a more prudent financial tradition.

In Europe, as a result of national traditions and diverse regulations, there is a rather crude division between countries where property and consumer credit have been relatively open - Britain, Ireland and increasingly Spain and Norway - and more restrictive countries like France, Italy and Germany.

Comparing levels of indebtedness across Europe is problematic; there is little harmonized data and methodologies differ. According to a recent poll by Thomas Charles, a consumer debt consultancy, and the polling firm YouGov, 8.2 million British adults are in serious debt and 2.1 million are struggling with repayments.

According to the Bank of France, 865,000 cases against overindebted people were registered with courts from 2002 to 2006, an annual increase of 6.5 percent.

According to the Council of Mortgage Lenders in Britain, total household debt has grown sharply as a percentage of disposable annual income and currently stands close to 150 percent. The comparable figure for France in 2006 was close to 70 percent, according to the Bank of France.

Reifner said that credit tends to be more freely available in Protestant countries where families are more diffuse; in countries like Italy, where the family structure is more tight-knit, the assumption is that family will replace borrowing by providing certain kinds of support, like housing.

Reifner, who is also secretary general of the European Coalition for Responsible Credit, an association of consumer agencies, academics, and other nongovernmental organizations, said that in Germany there was less debt in the Roman Catholic south than in the Protestant north.

"In France, the attitude to debt is typical of a Catholic country - it's a bad thing," said Jean-Michel Six, chief economist at Standard & Poor's in London. "Even the baby boomers grew up thinking that someone without debt is someone without problems."

Other factors have helped create different credit cultures. Countries where incomes are higher tend to have more credit because consumers are optimistic about their ability to repay. Also, preferences like the German tendency to rent property have affected debt levels, while countries with strong welfare systems tend to have less debt because child-related expenses are covered by the state.

Societal attitudes are the backdrop against which countries draft their regulatory policies, and credit is no exception. Nicolas Bouzou, at the research group Asterès in Paris, said far fewer credit products were available in France because of weighty regulation, barriers to market entry and the fear of debt. Also, banks have traditionally had a monopoly on credit and savings.

But as Europe moves to harmonize finance services, the national distinctions are slowly blurring. Even France is now being dragged, somewhat reluctantly, toward a more liberal model by Brussels.

This month, the European Commission ordered the Groupement des Cartes Bancaires, a group of banks that accounts for over 70 percent of card payments here, to end practices that hinder other institutions from issuing cards at competitive rates.

On the consumer side, the interest on loans cannot exceed a usury rate set quarterly by the Bank of France. A host of other European countries have similar laws.

The consumer loan sector in France is a close-knit club dominated by specialist companies like BNP Paribas' Cetelem; Cofinoga, a subsidiary of the retailer Galeries Lafayette; Crédit Agricole's Sofinco; and Franfinance, owned by Société Générale. Few overseas players have found it worthwhile staying. One exception is GE Money Bank, which entered through an acquisition in 1995. Egg, the British credit-card operator and online bank, pulled out of France in 2004 after two years, lacking customers.

By contrast, the consumer credit landscape in Britain is open. Any company that receives a license from the Office of Fair Trading can offer credit. Among the groups that have expanded aggressively in personal finance are U.S. companies like MBNA and Citibank, retailers like Marks & Spencer, and other integrated groups like Virgin.

Unsurprisingly, there are worries across the Continent about moving too swiftly to the Anglo-Saxon model.

Yet the appeal of credit as an important engine of consumer spending is apparent to some French policy makers. Joël Bourdin, vice president of the Senate Finance Committee, has argued that French consumers are "underindebted" and that the lack of borrowing flexibility acts as a drag on consumption.

Someone who knows well the European credit scene is Jan Grenth. A Norwegian, Grenth helped shake up his country's market by introducing a credit card under the Bankia Bank brand based on the U.S. model of more credit, no charges and relaxed conditions. Since 2006 he has been involved in offering a card with Mastercard to Germans.

"The returns are there, the customers are there, but in countries like Germany, the banks won't offer U.K.-style credit cards," said Grenth, senior marketing officer at the bank in Luxembourg. "A lot of banks aren't interested."

In Britain, where property has been such an important motor for the economy, the financial outlook is clouding even for borrowers not in the subprime category, as interest rates move up. According to CACI, a research firm, increases in mortgage payments of up to 33 percent are likely for 287,000 households whose fixed-rate mortgages expire by the end of the year. Another 320,000 loans will reach term between January and August.

"We have a high transaction housing market driven by low transaction costs, expectations of higher prices, a financial system which lends a high proportion and a loan-to-asset ratio which is extraordinarily high," said Will Hutton, a British author and chief executive of the Work Foundation, a consultancy in London.

"Is there a regulation issue here? Absolutely."

Many property owners on the Continent have benefited as the value of their homes has been driven higher by foreign investors. This has also been good for local economies, providing jobs in construction, tourism and related services.

Michael Ball, professor of property economics at the University of Reading Business School, has warned of lower prices in Europe. He cited a surplus of stock and the global credit crunch. An index of Spanish house prices from the property portal found that prices were off 1.2 percent in the third quarter. In France, the national real-estate federation, FNAIM, said home prices fell 0.9 percent in the third quarter.

Back in Britain, Silver, the former bank employee, is reflecting on her experience as she turns her life around.

"Consumers have a lot of responsibility, but lenders do, too," she said. "Perhaps we should go back to old-fashioned banking."

ID: 40412
Author(s): SCR
Publication date: 27/10/07

Link to International Herald Tribune Article from 26th October 2007

Created: 29/10/07. Last changed: 29/10/07.
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