Subscribe to Dollars & Sense magazine. Recent articles related to the financial crisis. The Looming Disaster of Credit Card DebtFrom The Financial Times:How the cards are cut By Patrick Jenkins,Francesco Guerrera and Saskia Scholtes Financial Times Published: July 27 2009 03:00 | Last updated: July 27 2009 03:00 Mick Longfellow is teetering on the edge of financial chaos. A dedicated teacher married to an equally hard-working nurse, living in a modest house in Newcastle in the north-east of England, the pair spent the past decade treating themselves to gadgets, gizmos and home upgrades. They put in new windows. They bought the biggest television and sound system their living room could accommodate. They changed their cars every year or two. With two children to spoil as well, they were living on credit - lots of it. There were store cards, car loans, personal loans and credit cards. Now, amid the recession, those lenders want their money back. "The bank just closed down our overdraft. That was the killer blow," says Mr Longfellow. But with the family's debts running to 30,000 pounds ($49,200, 34,600 euros), far more than their annual disposable income, repayment is going to take a very long time. It is a sad blow for the Longfellows. But multiply one family's debts by the millions of people across the world who are in an even worse state, losing jobs and homes, and the scale of the problem is clear. Estimates from the International Monetary Fund say that of US consumer debt totalling $1,914bn (1,166bn pounds, 1,346bn euros), 14 per cent will turn bad. For Europe, it expects 7 per cent of the $2,467bn of consumer debt will be lost, with much of that falling in the UK, the continent's biggest nation of borrowers. In the US, the carnage is well under way. For nearly two years, banks ranging from giants such as Citigroup to small community lenders have been bleeding as the economic downturn caused "maxed out" consumers to fall behind on their repayments of credit cards, automotive loans, student loans and other once-plentiful forms of credit. In recent months, what started as a debacle has turned into a nightmare. As unemployment continued to rise and house prices kept falling, the rate of defaults has surpassed historic norms, rendering many of the computer models used by US banks to predict losses useless. In this phase of the crisis, lenders are flying blind. "We are asking boards of financial institutions to sit down, think about plausible nightmare scenarios and then take measures to deal with them," says Peter Niculescu, a former executive at Fannie Mae, the US mortgage institution, who is now a partner at Capital Market Risk Advisors, a financial consultancy. Read the rest of the article Labels: baillout, banking crisis, banking industry, Credit card industry, financial crisis Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). |
