Risk of credit card default in Ireland intensifies

US consumers are bearing a personal debt burden in excess of €1,732 billion and the IMF estimates that over €240 billion of this will not be repaid.  The credit crisis there started with sub-prime mortgages then moved to mainstream mortgages, car loans and, most recently, to credit card debt.

There has been an increase in US credit card debt default as unemployment there rises to over 9%.  The incidence of credit card debt default in the States typically mirrored their unemployment level.  The personal debt default trend in Europe is also deteriorating but has not been as severe as in the US.

The ratio of consumer debt to income has been rising to about 140% in the US.  It hovered around the 90% mark in the last recession.

This begs the question – what is happening in Ireland?  Irish politicians usually attempt to put the best possible spin on a glaringly adverse trend, with remarks such as “the rate of deterioration has slowed”.  It is true that the level of personal credit card debt in Ireland has declined as consumer confidence has waned and retail sales levels have collapsed by over 20% in the case of the high street and by over 60% in the case of vehicles.  However, the number unemployed has risen dramatically and if defaults by Irish credit card users were to mirror the American experience, credit cards providers will be seeing a growth of over 100% in irrecoverable debts, as the following table illustrates:

End Feb	Personal credit card debt	Number unemployed	Unemployment Rate	Debt default risk
2009	€889.5M	222,800	10.2%	€88.95M
2008	€1,092.6M	109,400	4.9%	€53.53M
2007	€1,008.1M	98,100	4.5%	€45.36M
2006	€870.9M	88,200	4.4%	€38.31M

 

The Central Statistics Office reported on 25 June that employment in Ireland had fallen by 7.5% in 2009 to 1,965,000 persons.  Full-time employment dropped by 176,200 in the past year.  The decline in the Irish labour market is being attributed to a decline in participation by 46,000 persons.  There is also a demographic aspect.  The Irish  labour force has grown through net inward migration which reached a peak in early 2006 when the labour force growth was over 100,000 persons and 70,000 of this was accounted for by immigrants.  There is now a lower level of net inward migration.

Business Exposure to Indebted Consumers’

Businesses are being obliged to pay much greater attention to the risks associated with customers dependent on credit and how to manage exposure to this.   Three benchmarks to keep track of include the ratio of credit sales to cash sales, gross profit and operating income.  The objective is to moderate the consequences of any change to a customer’s credit position.  Studies have demonstrated that credit card sales are more volatile as a consequence of changes in credit limits; transactions fees that can rise as defaults rise and these are borne by traders.  If a credit card processor should go out of business the risk accruing to traders will increase.  If the proportion of credit card users who default that a particular business does business with becomes disproportionate the risk borne by the trader increases.

It would be clearly absurd to abandon credit card sales but it is important to consistently monitor associated risk and volatility.