Dead Men Left

Wednesday, June 08, 2005

Bad debt

Not good:

Royal Bank of Scotland, Britain's second biggest bank, today reported an increase in provisions to cover bad debt as economic conditions for customers become tougher.

The Edinburgh-based bank has followed rivals, including Barclays, in revealing that credit arrears had grown. However, it insisted there was no cause for alarm and said the figures were "within normal parameters".

Under abnormal conditions. Private borrowing is now somewhat over £1 trillion in the UK. What Will Hutton praises as "boosting personal spending via easy credit and mortgages collateralised against property" has seen the British economy through an extraordinary period of government and trade deficits alongside huge private dissaving. That situation can rest for as long as "easy credit and mortgages" can be provided by the financial sector; but the more they are asked to provide, the more unstable this uneasy balancing act becomes.

Each new loan advanced exposes a bank to an increased risk of default. To insure against default, they can demand collateral. But the value of that collateral - house prices - is itself determined within this financial circuit. The insoluble problem is that the point at which property prices turn sour and banks become less willing to provide debt is precisely the point at which further loans are needed by consumers. One indicator here is repossesions, which are already rising significantly.

This doesn't mean a return to the breadlines, nor even that a recession is inevitable. It does mean that New Labour's claims to have transformed the UK economy through their economic reforms will be put to the test. Significant structural weaknesses have been covered over by the consumer borrowing boom. The lopsided dependence on the service sector to deliver growth, for example, is fine until the service sector stops growing (or, at least, stops growing so fast). For those in "flexibilised" labour markets, and carrying huge levels of personal debt, those economic weaknesses translate too quickly into direct personal hardship.