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.

Ireland’s wilting personal wealth

The nest-egg of the average Irish household has declined by 42% from €95,022 in 2006 to €55,113 at the end of 2008.

This downturn is reflected in the financial assets owned by the households of Ireland. Net financial assets fell by €36.1 billion to €81.2 billion in 2008.

The Central Statistics Office has just issued a balance sheet of net financial assets for 2008 and this reveals the following downward trend:

 

€ Billion	2005	2006	2007	2008
Financial Assets, Jan 1	234.3	269.0	307.8	308.3
Net acquisitions	18.2	13.1	10.6	8.9
Valuation changes	16.4	25.8	-10.1	-34.7
Financial assets, Dec 31	269.0	307.8	308.3	282.5
Liabilities, 1 Jan	110.3	140.1	167.9	191
New borrowing	29.9	27.8	23.2	10.5
Valuation changes	0	0	-0.2	-0.1
Liabilities, 31 Dec	140.1	167.9	191.4	201.4
Net financial assets, 1 Jan	124.1	128.8	139.9	117.1
+ financial transactions	-11.7	-14.8	-12.6	-1.7
+valuations changes	16.4	25.8	-10.0	-34.4
Net financial assets, 31 Dec	128.8	139.9	117.3	81.2

Financial assets include deposits, shares and securities other than shares, life insurance and pensions, accounts receivable and liabilities comprise mainly loans, both short and long-term.

The decline in new borrowing from €23.2 billion in 2007 to €10.5 billion last year is both a reflection of the credit crunch and a decline in the demand for mortgages.  The main cause in the decline in personal wealth is the collapse in the valuation of financial assets in 2007 and 2008.

The 2006 Census of Irish Population indicated that there were 1,473,345 occupied houses in Ireland, an average of 2.81 persons per household. There were a further 296,000 vacant houses and apartments, including 50,000 holiday homes.

Residential construction was one of the major sources of taxation during the boom. The residential sector alone yielded over €1 billion in 2006 and 2007 but the total anticipated yield from stamp duties in 2009 is only €980 million.

The Irish economy is suffering the catastrophic consequences of a property bubble funded by Irish banks who raised the wherewithal on wholesale markets in Ireland and elsewhere.  The economy has been in damage-limitation mode since last Autumn.  The first initiative was the State guarantee of customer deposits, (or bank liabilities).  Ireland, I believe was the first of many countries to make this move last September.  The second step has been the recapitalisation of the banks using the resources of the National Pension Reserve Fund for this purpose.  The third initiative has been the establishment of a ‘bad bank’, the National Asset Management Agency.  A review of the banking sector is outstanding both in terms of its fitness for purpose, regulation and scope of activities.  Some consolidation is anticipated together with the removal of reckless and  incompetent bankers.  The sector has all the characteristics of a dysfunctional family for the time being with grandparents taking over parenting duties.  Old geysers, who have been retired for years are turning up in board rooms, some of whom never worked in the sector and who know as much about banking as I do about high-end prostitution!