Consumers' Debt trap of payday loans in UK

 
A third of people experienced greater financial problems as a result of taking out a payday loan, according to Which?

Payday loans are trapping increasing numbers of consumers in a downward spiral of debt caused by exorbitant penalty charges, a consumer group has warned.

More than 60pc of people who take out payday loans are using the money for household bills or buying other essentials like food, nappies and petrol, a survey by Which? found.

The figures show an "alarming" picture of people trapped in debt caused by penalty charges because they cannot afford to pay back the loan on time, the watchdog said.

A quarter (25pc) of those who had taken out loans said they had been hit with hidden charges such as high fees for reminder letters, and one in five (18pc) were not able to pay back their loan on time.

A third of people (33pc) experienced greater financial problems as a result of taking out a payday loan, and 45pc of them were hit with unexpected charges.

Which? said the debt trap was compounded with 57pc being encouraged to take out further loans and 45pc rolling over their loans at least once.

A third of people (33pc) were bombarded with unsolicited calls, texts and emails before they had even signed an agreement.

The investigation of 34 payday loans companies' websites also found that customers could face a £150 charge by one company, Quid24.com, if they repaid their loan 10 days late. Most of the companies failed to show clearly their charges or charged excessive amounts for defaulting.

Consumers were also potentially being allowed to take on credit they could not afford, with eight out of 34 companies failing to carry out any credit checks as part of their approval procedure and nearly two-thirds of those surveyed not asked about any aspect of their financial situation apart from their salary.

Some websites failed to provide any terms and conditions and many of those that did had little or no information about a borrower's rights and obligations or references to free debt advice.

Which? is calling on the Office of Fair Trading to enforce existing consumer credit and lending rules that already apply to payday loans firms and to restrict the default charges that payday loans companies can charge.

Which? executive director Richard Lloyd said: "With 1.2 million people taking out a payday loan last year, it is unacceptable for this rapidly growing number of people to be inadequately protected from extortionate charges and dodgy marketing techniques.

"At its worst, this booming £2bn industry can be seriously bad news for borrowers who are struggling to afford food or pay their bills. People are getting caught up in a debt trap, whacked with high penalty charges, or encouraged to roll over payments and take out more loans at inflated rates.

"The regulator should properly enforce the existing rules that apply to this industry, but they must go further and impose a cap on the amount that lenders can charge for defaulting.

The Government should also now explore other ways to protect hard-pressed borrowers, including Australian-style measures to cap costs and promote affordable alternatives."

Consumer Focus director of financial services Sarah Brooks said: "This research throws up some extremely troubling findings and poses many uncomfortable questions about the growing payday loan sector.

We have long held concerns about the behaviour of some payday lenders and whether consumers are losing out because this industry is not regulated strongly enough.

"Our research in 2010 showed problems with inadequate affordability checks and borrowers being offered multiple new loans or roll-overs on existing loans. Which?'s findings suggest that problems have worsened in this industry and that more borrowers are finding themselves caught in debt traps. Millions are turning to these loans in the current economic climate and it is usually those on lower incomes that suffer most.

"This work is timely given the OFT's compliance review of payday lenders. There is clearly a continuing problem with payday loans and this should give further incentive, if any is needed, for the OFT to act quickly to protect consumers from spiralling debt." Telegrah

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Reining in household debt by Bank Negara Malaysia

The responsible lending guidelines, among the pre-emptive measures by Bank Negara to contain surging household debt, have made a strong impact on most people. Will the guidelines be effective to control the alarming levels of household debt and put the brakes on loan growth? 

THE responsible lending guidelines, which came into effect on Jan 1, created quite a stir in the banking industry with leading indicators signalling further signs of loan growth slowing in the coming months.

There is some discontent among consumers in terms of having their loans approved based on net income compared with gross income previously, in addition to which is the need for more documentation.

Some automotive players and property developers are not too happy either as they feel the move will be a dampener to their business moving forward. Loan growth for January was lower at 12.1% year-on-year (y-o-y), probably the slowest since 2010, compared with 13.6% y-o-y in December last year mainly due to slower growth in the household and business segments.

Total application and approval for loans in January was down almost 3% from a year ago although those disbursed rose by 5.6% y-o-y.

Loans in the household sector, which has a high level of indebtedness, was dragged down by slower growth in auto, mortgage and personal loans. But some quarters argue that this could be attributed to shorter working days in January due to the Lunar New Year break and other holidays.

Officials say that a loan growth in the region of 12% appears to be fine and much stronger growth may be a problem if left unchecked.

Indications are that loan growth to households, which was lower in 2011 than 2010, will normalise in February this year after the dip in January.

Whatever the arguments are, this trend, if it does continue, can be seen by some quarters as worrisome. Will loan growth then continue to slide? Some industry observers and analysts think so.

Loan growth mixed signals

Under the guidelines, banks are, among others, required to apply the net-income calculation method instead of gross income when computing the debt-service ratio for potential borrowers. The lending guidelines cover housing, personal and car loans, credit cards, receivables and loans for the purchase of securities.

Malaysian Rating Corp Bhd chief economist Nor Zahidi Alias says based on indicators, the rating agency feel that loan growth will likely moderate this year to a single-digit figure compared with a 13.6% growth recorded last year.

Nor Zahidi says the stricter guidelines is a step in the right direction.

This is due to the fact that some potential borrowers will no longer be eligible for certain types of loans, he says. This, he adds, is evidenced by a steep drop in the volume of passenger cars sold in January by 25% compared with the same period last year following stricter hire-purchase loan processes.

Total vehicle sales, however, rebounded by 9% in February with industry sales hitting 44,013 units from 40,387 units in February 2011.

Going forward, Zahidi says he foresees further decline in the banking sector loan growth as banks continue to be extra prudent in their lending practices, adding that there are also declines in loan applications for cars, credit card and residential properties based on latest indicators.

Loan applications for purchases of passenger cars contracted by 15.5% in January from 7.8% growth in December 2011. Another significant drop was the application for the amount given to the credit card segment which fell by 50.9% in January from a decline of 10.2% in December 2011. Applications for loans for the purpose of purchasing residential properties contracted 6.3% from a growth of 11.3% in December 2011.

Approvals for loans categorised for “personal uses” declined by 29.8% compared with a 42.4% growth in December 2011 while the amount of loans approved for the purchase of passenger cars and residential properties contracted by 18.4% and 20.9% respectively in January (December 2011: 0.3% and 1.8% respectively).

The Association of Banks in Malaysia (ABM) says the implementation of the guidelines will not have a direct relation to its member banks' loan growth. Factors like global economic conditions and its impact on the regional economy as well as developments on the external and domestic front will be the more pertinent factors that will have an effect on loan growth, it says.

“The guidelines merely set out to better define the expectations of banks to act responsibly and transparently when lending. The policies and practices envisaged are not entirely new as they underscore the existing approach taken by our members. While it will ensure that the debt commitments of individuals and households are within their repayment capabilities, customers who can afford to repay will not be denied access to financing,” it says.

A robust retail finance market, ABM says, cannot be measured by loan growth alone as the obligations (financial and contractual) to repay, sound personal financial management skills and responsible financing practices are more important to the stability and sustainability of the market in the long run.

Weaker numbers

The occurance of non-performing loans and loans in arrears appear to be falling, and they are what bankers and regulators are paying close attention to. That will indicate that the responsible lending guidelines, even though they may crimp the longer-term trend, is not having an impact on the quality of existing loans.

Wong expects loan growth to taper to 8%-9% after clocking in a strong 14% last year.

 

CIMB Research says in one of its notes that it expects a slowdown in loan growth this year due to weaker numbers from all major loan segments including residential mortgages and auto loans.

RHB Research Institute considers that on the whole, the new guidelines will have some impact on household loan growth, but the extent of the impact remains to be seen.

As for demand for loans from the household segment, the research outfit does not think the growth will fall off the cliff, but rather will be at a more moderate pace relative to recent years.

Jupiter Securities head of research Pong Teng Siew feels that with the strict adherence to the lending guidelines, loan growth may hit 8% or less sometime later in the year but may pick up in some months.

OSK Research is maintaining its loan growth projection for this year at 9% despite the guidelines which it says will play a part in slowing loan growth. The projection was underpinned by Economic Transformation Programme (ETP) projects.

RAM Ratings head of financial institution ratings Wong Yin Ching expects loan growth to taper to 8%-9% after clocking in a strong 14% last year.

This, she says, will be supported by expectations of a real gross domestic product growth of 4.6% in 2012 (2011: 5.1%) and a more moderate household loan growth due to various prudential measures introduced since late-2010. Loans growth is said to be correleated to economic growth and with the Government seeing growth to come in at 4%-5% this year, expectations are that the pace of loans given out will accelerate at a slower pace.

Wong says the loan growth will be partly balanced by stronger financing demand from the corporate and commercial sector in anticipation of the rollout of projects under the ETP and 10th Malaysia Plan gaining momentum.

Meanwhile, Maybank IB Research, with a neutral call on the banking sector, says it expects domestic loan growth of 10.5% this year, up from its previous forecast of 9.4%, adding that mortgage lending is expected to hold up better than anticipated.

According to Bank Negara's Financial Stability and Payment Systems Report 2011, the growth of household debt to gross domestic product (GDP) increased last year but the pace was slower with outstanding household debts expanding by 12.5% to 76.6% for the year compared to 2010 when debt grew 13.7% to 75.8%.

It adds that signs of stabilisation in household debt relative to GDP was seen from the second half of last year after a continued upward quarterly trend observed since 2009 with borrowing continuing to be concentrated on residential properties and motor vehicles, which together account for 64% of total household debt.

The report states that bank lending to individuals earning more than RM3,000 per month accounted for about 80% of total loans to households by the banking system.

Choo says the guidelines will not have any adverse impact on those with genuine capacity to repay.

It adds that bank exposure to borrowers with monthly incomes of RM3,00 or less was relatively low representing less than 13% of total banking system loans. “Based on historical experience on the level of impairment and provisioning, any impairment losses to banks are not likely to exceed RM2bil or less than 8% of pre-tax profits of commercial and Islamic banks,” it notes.

The growth in household debts had also been accompanied by a corresponding expansion in household financial assets, it says, adding that stronger growth in household deposits which expanded by 12.2% balanced the slower increase in financial assets.

Timely move?

Despite the brouhaha surrounding the pre-emptive measure, many feel the introduction of the guidelines is timely and justifiable.

RAM's Wong views it as one of the many measures to contain the growth of household debt.

The banking system's household financing has been rising steadily over the last five years and currently constitutes about 55% of the system's total financing, she says, noting that the growth has stemmed mainly from home and personal loans.

As a result, she says, Malaysia's household debt-to-GDP ratio has trended upwards from 69% in 2006 to 77% in 2011. Compared to other countries in the region, this figure is considered high especially when looked at in relation to GDP per capita, she adds.

Some of the other pre-emptive measures which Bank Negara had earlier imposed to control rising household debt include tighter criteria for residential property financing, such as a 70% loan-to-value (LTV) cap on a borrower's third housing loan and beyond, as well as raising the income eligibility criteria for credit cards.

Some analysts concur that the lending guidelines are vital to ensure quality loan growth and some form of control is necessary. With ringgit deposits slowing, analysts expect banks to start pulling back on lending even in the absence of the guidelines.

Zahidi says the guidelines are introduced to ensure that the consumer segment will not be overstretched for too long. While it will take a few years before Malaysia's household debt can be reduced to below 60% of GDP, the stricter guidelines is a step in the right direction, he says.

However, he adds that this will have some adverse effects on the banking sector's loan growth as well as on private consumption.

OCBC Bank (M) Bhd country chief risk officer Choo Yee Kwan says credit assessments under the guidelines are done holistically by taking into account the total debt obligations of an individual borrower and will not have any adverse impact on those with genuine capacity to repay.

At the same time, he says, it will help to deter borrowings for speculative purposes and align debt burden more closely with repayment capacity.

 

Cavale says the long-term impact on banks is yet to be determined.

“While the guidelines are relatively prescriptive on the lending approach, they are really complementary when viewed from the vantage of a bank with more advanced risk assessment tools and portfolio screening and early warning triggers for sustainable loan portfolio health,” Choo explains.

A banking analyst from MIDF Research, on the other hand, thinks that while the guidelines on the whole are good, some details are vague and not properly spelt out. For example, there is no mention of specific details on liability as well as on debt servicing ratio, and is left to individual banks to assess the risk appetite of loan applicants.

Citibank Bhd managing director for cards and consumer lending Anand Cavale feels that while the guidelines will strengthen the control for lending, the long-term impact on banks is yet to be determined.

Although it will help reduce the level of household debt, this will depend on the state of the economy, as household debt is directly linked to the performance of the country's economy, he says.

While the guidelines will strengthen the overall ability to lend prudently, Cavale believes there should be proper infrastructure in place. For example, banks having accessible ways to the customer income information will help the process to implement the guidelines more smoothly, he points out.

Other areas of focus

Some analysts feel the stringent lending guidelines may cause banks to shift their focus to other areas to boost their bottomlines.

The MIDF Research analyst says banks may, for example, look to increase high net worth individuals or affluent customers for their credit cards as in the case of Malayan Banking Bhd. This, he adds, will include cross selling of cards to this segment.

For the mortgage side, banks may look into issuing more financing for landed properties in selected locations and for the auto business, they may source for stronger dealership, the analyst says.

Choo says OCBC Bank's objective is to derive 30% of its income from non-interest income sources, noting that it is keen to diversify and strengthen its deposit base to ensure it is not overly concentrated in any one specific segment.

According to Cavale, it is likely that banks will add other products or services that will support additional streams of income to mitigate potential reductions in the lending area.

Another area which banks are aggressively pursuing currently is the small and medium enterprise (SME) segment. This segment, according to an analyst with an investment bank, will provide better margins and probably make up for the shortfall in slower loan growth from the stringent guidelines.

Those banks which were not focusing on the SME segment will now have to employ strategies to capture this growing segment, he adds.
  
By DALJIT DHESI daljit@thestar.com.my

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Moody's declares Greece in default of debt

Bond credit rating agency says EU member has defaulted on its repayments as it secures biggest debt deal in history.



Moody's Investors Service has declared Greece in default on its debt after Athens carved out a deal with private creditors for a bond exchange that will write off $140 billion of its debt.

Moody's pointed out that even as 85.8 per cent of the holders of Greek-law bonds had signed onto the deal, the exercise of collective action clauses that Athens is applying to its bonds will force the remaining bondholders to participate.

Overall the cost to bondholders, based on the net present value of the debt, will be at least 70 per cent of the investment, Moody's said.

"According to Moody's definitions, this exchange represents a 'distressed exchange,' and therefore a debt default," the US-based rating firm said.

For one, "The exchange amounts to a diminished financial obligation relative to the original obligation."

Secondly, it "has the effect of allowing Greece to avoid payment default in the future."

Ahead of the debt deal, Moody's had already slashed Greece's credit grade to its lowest level, "C," and so there was no impact on the rating.

Moody's said it will revisit the rating to see how the debt writedown, and the second Eurozone bailout package, would affect its finances.

However, it added, at the beginning of March "Moody's had said that the risk of a default, even after the debt exchange has been completed, remains high."

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How American Consumers Handle an Ever-Growing Heap of Personal Debt?

Source: Cornell University Newswise — ITHACA, N.Y. – Got debt?

Probably. Most Americans do. Bombarded by home mortgages, college loans, credit card payments and car loans, the typical American consumer faces a mountain of financial obligations. Louis Hyman, Cornell assistant professor in the College of Industrial and Labor Relations, will speak to journalists about debt in his new book, “Borrow: The American Way of Debt,” on Friday, Feb. 10, 2012 at 10 a.m. at Cornell’s ILR Conference Center, sixth floor, 16 E. 34th St., Manhattan.



“Borrow: The American Way of Debt” is a lively, historical account of consumer debt in America, published by Vintage/Random House on Jan. 24, 2012.

In this society, debt is pervasive. Hyman says the average American owes more than $15,000 in credit card debt alone, and he provides a fresh look at the financial mess in which millions of Americans wallow. “Today’s problems are not as new as we think,” Hyman says.

“Borrow” examines how the rise of consumer credit – virtually unknown before the twentieth century – and how it has altered our culture and economy.

“My book puts today’s economy in context and helps explain how we got here, and then offers some novel solutions for today's troubles,” Hyman says

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Malaysia's public debt rises to RM407bil

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By EUGENE MAHALINGAM eugenicz@thestar.com.my

PETALING JAYA: Malaysia's public debt level rose 12.3% to RM407.11bil in 2010 from RM362.39bil a year earlier, according to the Auditor-General's Report 2010.

National debt grew 12% to RM390.36bil in 2010 from RM348.60bil a year earlier while foreign debt grew 21.5% to RM16.75bil from RM13.79bil in the previous corresponding period, said the report released yesterday.

In 2010, unresolved public debt both at the national and foreign level grew by RM41.76bil and RM2.96bil respectively compared with 2009.

“The national debt level totalling RM390.36bil accounts for 95.9% of the Federal Government's total debt,” auditor-general Tan Sri Ambrin Buang said in the report.

He pointed out that the ratio of the Federal Government's debt to gross domestic product at the end of 2010 was 53.1%, which was over 50% for the second year in a row.

The national debt level is governed by various laws that impose a debt ceiling for the Government. Under Act 637 of the Loan (Local) Act 1959, and Act 275 of the Government Investment Act 1983, it is stated that the combined loans raised domestically should not exceed a ceiling of 55% of the nation's GDP.

Meanwhile, Act 403 of the External Loans Act 1963 limits external loan exposure to RM35bil.

The report also revealed that in 2010, the Government received revenue totalling RM159.65bil, which was an increase of RM1.01bil (0.6%) compared with RM158.64bil in 2009.

Accounts receivable for 2010 stood at RM20.37bil while the Government approved allocation amounting to RM149.06bil for operating expenditure. “However, the said allocation was insufficient to cover the expenses amounting to RM151.63bil,” said the report.



The report also revealed the implementation of a rating system based on an accountability index.

“Through this rating system, marks will be given for the compliance if regulations of six main elements in financial management, namely management controls, budgetary controls, receipt controls, expenditure controls, management of trust funds and deposits as well as management of assets and stores.

“The federal ministries and departments rated as excellent become a role model and this would motivate others to diligently improve and enhance their financial management,” it said.

Europe puts its head in sand over growth crisis

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LONDON | Mon Sep 5, 2011 By Alan Wheatley, Global Economics Correspondent

(Reuters) - Japanization is shorthand for slouching toward that country's noxious mix of low growth and high debt. Euro zone governments will find it tough to keep the ugly new word out of their lexicon.

Concern is mounting over a deterioration in Europe's long-term growth prospects that, unaddressed, will make it even harder to tackle the banking and debt problems underlying the current life-or-death struggle over the euro.

The financial crisis that has been rocking the global economy since 2008 has permanently reduced trend growth across the industrial world. The Organization for Economic Cooperation and Development in Paris reckons the potential output of its 34 member countries has dropped by about 2.5 percent.

"A lot of countries are going to take a permanent hit to their trend rate of growth. This is not an ordinary recession and so we're not going to see countries bouncing back to pre-crisis rates of growth," said Philip Whyte, a senior research fellow at the Center for European Reform, a London think-tank.

As firms have gone bust, capacity has been lost for good. With demand subdued, profitable companies are not replacing old plants.

And as high unemployment persists, skills atrophy. This weakens productivity and shuts people out of the job market for longer and longer periods -- a danger stressed by Federal Reserve Chairman Ben Bernanke at the U.S. central bank's Jackson Hole symposium last month.

Apart from sapping animal spirits and forcing governments to raise taxes or cut spending, diminished growth closes off one route for lowering the high sovereign debt to gross domestic product ratios that have locked Greece, Ireland and Portugal out of the bond markets and are unnerving investors in Italian and Spanish debt.

Against this background, and with the scope for fiscal and monetary stimulus all but exhausted, politicians might be expected to grasp the nettle and push through reforms to improve the supply side of the economy -- policies such as making it easier to hire and fire, promoting greater competition and investing more in training.

Far from it. Pier Carlo Padoan, the OECD's chief economist, says he is less optimistic about the prospects for deep-seated change than he was at the start of the year.



"I see that measures are being announced. I would like to see them being implemented," Padoan said.

With policy ammunition running desperately short, he said it was time for governments to overcome their squeamishness about confronting vested interests opposed to change. "This is a luxury that many countries cannot afford any more. The situation does not allow it."

SOUTHERN DISCOMFORT

The vicious circle of rising debt and falling growth is made worse by the fact that those countries drowning in debt on the periphery of the euro zone are also the ones that have dragged their feet on freeing up their product and labor markets or modernizing their education systems.

"They're going through some truly horrible times. I'm very worried about the whole southern European fringe, not just on an 18-month to 2-year view but looking out a decade or longer," said Whyte with the Center for European Reform.

Germany, by contrast, derided a decade ago as the sick man of Europe, is being held up as a model, at least when it comes to jobs.

"The remarkable resilience of the German labor market in the last few years, where wage moderation and flexible time accounting shielded the economy from excessive job destruction, illustrates admirably the promise of well-structured reforms," Jean-Claude Trichet, president of the European Central Bank, said approvingly in Jackson Hole.

How much are countries missing out by not pressing the reform button?

Padoan says Europe's trend growth has fallen in recent years to an average of just 1.5 percent a year, but he says some members of the 17-nation euro zone could almost double that rate with a supply-side jolt.
Italy needs to liberalize its service sector, open up professions to new entrants and improve energy efficiency, Padoan said. Greece needs to do all that and overhaul its labor market and competition policy at the same time.

POOR ADVERT FOR FREE MARKETS

Germany, too, could grow faster still if it liberalized services, which would trigger increased investment.

These policy prescriptions are well worn. Leaders of the European Union enshrined them and a host of other reform goals in the 2000 Lisbon Agenda, which they promptly ignored. The pledges have since been repackaged as the Europe 2020 Strategy, but Whyte says the havoc wrought by the near-collapse of the international financial system will make politicians more wary than ever of the social disruption that reforms entail.

"The Great Financial Crisis hasn't been a great advert for free-market capitalism," said Whyte. His research outfit publishes a booklet this week exploring how Europe could take off by embracing innovation. But in this area, too, Whyte fears the political climate means policy is likely to be increasingly hijacked by incumbent firms hostile to competition from start-ups.

Europe is not doomed to go down Japan's path of economic stagnation. Its potential growth rate is low but stronger than Japan's -- estimated by the Bank of Japan at just 0.5 percent a year because of a fast-shrinking working-age population.

But the specter of a renewed recession is a reminder for governments that, even if they can spirit away the euro zone's currency and debt woes, they have still to find the elixir for growth.

"I'm not saying politicians will implement reform, but they should," Padoan said. "Some politicians resist reform because they are captive to interest groups. Well, the price for those governments in terms of sustainable growth will be very high."

(Reporting by Alan Wheatley; Editing by Ruth Pitchford)
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British loan sharks up 40% !

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Number using loan sharks in Wales up 40% in four years

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Loan sharks often target vulnerable people such as single parents on low incomes, according to the Wales Illegal Money Lending Unit
Continue reading the main story

The number of people in Wales turning to loan sharks has risen by 40% in the last four years.

The Wales Illegal Money Lending Unit (IMLU) said the figure has jumped from 15,000 to 25,000 since 2007.

The most vulnerable areas include Swansea, Newport, Cardiff, south Wales valleys and the north Wales coast.

Steven Hay, head of the unit, said victims were usually debt-ridden individuals trying to provide for their families.

He said loan sharks targeted vulnerable people like those on low incomes.

Funded by the UK government, but acting on behalf of Wales' 22 councils, the Cardiff-based IMLU has a mix of trading standards officers and former police detectives for its investigations.

Gambling debts 

Mr Hay told BBC Wales: "In other parts of the UK, it can exist around drugs, gambling debts or alcohol but we found that more than anything the people in Wales want to provide for their families and sometimes that drives them to go to a loan shark for money."

Continue reading the main story

Case Study

"Katie" is a single mother with two small children who got into trouble after borrowing £3,000 from a loan shark.

She had to pay back £5,500 - an interest rate of more than 100%.

"He was a very big man and I had heard what he had done to other people and what he was capable of," she said.

"I wasn't sleeping, I was suicidal and I was always worried that my kids would be better off with somebody else and that I should end it all for them to have a better life.

"It really was horrendous."

The loan shark lending money to Katie was eventually arrested and jailed.

He said that since its inception in 2007, the unit had identified loan books held by illegal money lenders totalling around £2.5m, and had managed to eradicate around £1m of illegal debt in Wales.

The team has also worked with 1,700 victims and brought 32 people to trial, but the figures are "just the tip of the iceberg", according to Mr Hay and his team.

Claire Smith of Swansea's LASA Credit Union, one of the areas identified as vulnerable by the team, advised people to use their services instead of turning to loan sharks.

She told BBC Wales: "If an illegal money lender is taken out of an area, the issue you have is if somebody has been using that as a source of credit and that credit is taken away, no matter how bad it is, and they think that there is nowhere else to go, another illegal money lender will just come in and take over the patch."

 

Steven Hay said the figures were just the "tip of the iceberg" and more victims are out there

Mr Hay added that loan sharks targeted communities with vulnerable people, such as families or single people on a low income, often reliant on welfare benefits.

Unlawful imprisonment 

Anyone who makes money from lending must have a consumer credit licence from the Office of Fair Trading.

The unit has uncovered many cases of people charged extortionate rates of interest, often with no paperwork.

As well as the threat and use of violence, loan shark criminality can extend to blackmail, money laundering, fraud and unlawful imprisonment or kidnap.

Mr Hay urged those experiencing problems with loan sharks to contact the team's 24- hour hotline on 0300 123 3311.

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• Big rise in families facing debts 16 NOVEMBER 2010, WALES
• Breaking free of the debt cycle 03 NOVEMBER 2010, WALES
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• Loan sharks 'target poor tenants' 04 NOVEMBER 2009, WALES 

What's left to trust in the world of money? Stop fooling around Govermnt Debts!

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Jeremy Warner

What's left to trust in the world of money?

America's inability to address its fiscal challenges – Sunday night's "bipartisan debt deal" offers only a temporary, sticking plaster solution – has raised afresh an old conundrum.

Relative to GDP, US sovereign debt has been far higher than it is today, but in the past America has been able to rely on fast growth and demilitarisation to return borrowing to tolerable levels. Neither of these things seem likely to come to the rescue this time around. Photo: REUTERS

If even US Treasuries are now regarded as a credit risk, is there anything left at all in the world of money that can be trusted?

The answer to this question is almost certainly no, but far from being a calamitous conclusion to reach, this might be viewed as a positive development which will in time restore market disciplines to a global monetary system which became based on make believe.

In fact, the idea of the sovereign as a "risk free asset" is a comparatively recent development which has no basis in historical experience. Even in a country such as Britain with no history of default (we'll ignore the case of war loans, which is arguable), government bonds have hardly proved a reliable form of investment.

True enough, coupons have been paid and maturities honoured, but the currency and inflation risks have proved extreme. On any medium to long term view, you would have done much better out of property and equities.

Among members of the eurozone, the concept of the sovereign as a safe haven asset is an even shorter lived phenomenon. The widening of spreads we've seen in the past year and a half of financial crisis is as nothing compared to the way it was before the single currency was launched.

Those countries with weak governance were punished for their lack of competitiveness with high interest rates and repeated currency crises. It was a brutal, but reasonably effective form of discipline.

But once the euro had been established, all countries, bad as well as good, came to enjoy the same low interest rates that Germany had earned from years of hair shirted fiscal rectitude. Bond yields converged not because anyone believed the single currency's fiscal rules would make all countries like Germany, but because markets expected that countries which got themselves into difficulties would be bailed out. They have so far been proved entirely correct in this assumption.

Peer group pressure

The abolition of sovereign currencies removed the pressures that markets normally exert on governments to take unpopular, austerity measures. Market disciplines were replaced by peer group pressure from European finance ministers, only a few of whom were in any position to lecture their colleagues on sound financial policies. Once even Germany started to break the rules, the game was up.

All this was brilliantly predicted by Norman Lamont, a former UK Chancellor in the chapter Why I am Against the Single Currency from his book In Office, published nearly twelve years ago.

Increasingly tortuous attempts to prevent wide scale default fail to acknowledge the underlying reality; membership of the single currency has allowed some countries to borrow far in excess of their ability ever to repay.

But it is not all the fault of the euro. Risk compression was a worldwide phenomenon during the boom. In the hunt for yield, investors became oblivious to the dangers. By the end, almost everything was regarded as entirely risk free. Credit rating agencies were corrupted into the process by giving top notch ratings to fundamentally unsafe assets. These judgements then became embedded in regulatory requirements and central bank collateral rules, making everything seem safer than it really was.

 Sovereign downgrades

Today, the rating agencies are accused of deepening the debt crisis with repeated sovereign downgrades, but if anything, their pronouncements understate the reality. Their discomfort is nowhere more apparent than with US sovereign debt. Even assuming the latest settlement – which envisages a $2.1trillion (£1.3 trillion) fiscal consolidation over ten years – is ratified, it's not enough to put public debt back on a sustainable trajectory.

It's perfectly true that relative to GDP, US sovereign debt has been far higher than it is today, but in the past America has been able to rely on fast growth and demilitarisation to return borrowing to tolerable levels. Neither of these things seem likely to come to the rescue this time around.

When Standard & Poor's placed the US on negative watch last month, it suggested that a consolidation of perhaps as much as $4 trillion would be required to safeguard the nation's triple A rating.

Heading for a downgrade

Implicitly, then, America is heading for a downgrade regardless of the fact that the immediate threat of default has been removed. Will S&P have the guts to go through with its threat? I'll believe it when I see it. Already S&P has appeared to backtrack in evidence to Congress.

The major rating agencies enjoy an unhealthily cosy relationship with the major sovereigns, and can usually be persuaded to do the "right thing" in the interests of financial stability. As ever, sweeping the issue under the carpet will only make the eventual crisis even worse.

But perhaps oddly, the immediate blow to America if the big agencies do decide to downgrade is likely to be more psychological than real; it may not matter too much for bond yields.


Despite loss of its triple A rating and central government debt in excess of 200pc of GDP, Japan continues to enjoy the lowest sovereign bond yields anywhere in the world.

This apparent paradox is explained by the fact that when there is generalised risk aversion, where consumers are reluctant to spend and companies won't invest, the consequent savings surplus tends to flow into the only place it can – government debt.

Some of the same phenomenon is occurring in the US right now. Much as China threatens to withdraw its support for the US dollar in protest at policies which it thinks debase the currency, it really has no option but to continue buying US Treasuries as long as it maintains such a big trade surplus with the US. The capital surplus is merely the mirror image of the trade surplus.

Dominant reserve currency status in any case gives the US unrivalled access to international borrowing. Dollar hegemony may not last for much longer, but for the time being there are no viable alternatives. 

This is both a blessing and a curse for the US – a blessing because it allows the country to keep borrowing at reasonable rates almost regardless of underlying public debt dynamics, and a curse because it maintains the addiction to debt.

If nothing is done, the façade will eventually break; that's the point at which to run for the hills. Food, property, energy – these are the things that retain value when money dies. - Telegraph

Govt debts – it’s time to stop fooling around

Plain Speaking - By Yap Leng Kuen

INDEBTEDNESS has become an unsavoury word, especially when an important economy like the United States faces potential default if its US$14.3 trillion debt ceiling is not raised in time.

As at press time, an agreement was reached on raising the debt limit; however, the uncertainty created during the stalemate prior to the agreement had cast an element of doubt in the markets over the long term viability of US Treasuries and a possible downgrade of US' credit rating.

The debt ceiling has been raised before; however, the severity of the problems faced by Greece and other countries with high debt levels has caused the US situation to be viewed with concern.

In fact, post-2008 financial crisis, government debt has become a major issue. In a research update, McKinsey Global Institute said while global debt and equity hit new highs, more than a third of growth last year was government debt.

According to McKinsey, the overall amount of global debt grew by US$5 trillion last year, with global debt to gross domestic product (GDP) increasing from 218% in 2000 to 266% in 2010.

Government bonds outstanding rose by US$4 trillion in 2010 while other forms of debt had mixed growth, said McKinsey.

The move to downsize debt needs to be backed up by a concrete and consistent plan that shows not just commitment but also conviction of all parties involved.

Countries with high levels of debt must show that they are not only able to save others but also themselves.

Part of a government's credibility lies in its ability to manage its finances. Simply put, this involves lowering or containing its costs while increasing revenue.

Much effort should be spent on plugging the leakages while taking pains that taxpayers, who usually bear the brunt of others' mistakes, are not disadvantaged.

Postponing the problem by merely raising the limit for another time just makes matters worse; the issue of indebtedness becomes more serious and future governments end up inheriting the problem rather than spending productive hours on new areas of growth.

To get the cooperation of taxpayers to sacrifice for another round of austerity drive will probably not be easy. They may question why they have to pay for the excesses when they had already paid on previous bailouts for the big boys.

It is therefore time to stop “fooling around” with the finances and really get down to work on solid improvements. A transparent approach with proper timelines that can be accessed by all will certainly help.

Once people see something concrete coming up, they will be more convinced and committed towards the common goal.

Moreover, money allocated in a fair and equitable manner will result in better support from taxpayers.

Associate editor Yap Leng Kuen recognises that managing a country is far more complex than a family although the same dose of common sense is required.

US Debt deal reached to avoid default, what others are saying?

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What China, Others, Are Saying About US Debt Deal?

Debt ceiling raised...again.

President Barack Obama said Sunday night that both houses of Congress finally reached an agreement to reduce the budget deficit and avert a debt default that would have likely sent the country into a recession.

“Leaders of both parties, in both chambers, have reached an agreement that will reduce the deficit and avoid default — a default that would have had a devastating effect on our economy,” Obama said in his remarks to the White House press Sunday shortly after the bill was signed. The first part of the debt deal cuts nearly $1 trillion from the federal budget over the next decade. Exact details were not immediately available.

“The result would be the lowest level of annual domestic spending since Dwight Eisenhower was President,” Obama said. The debt limit and cut spending between $2 trillion and $3 trillion.

The Economic Times of India polled readers who said overwhelmingly that the Indian market would be impacted on Monday as investors in the US digest this weekend’s news. A total of 85% of the paper’s readers polled on line said it would impact India’s market all week.

Russian newswire columnist Andrei Fedyashin said recently, before Sunday’s deal, that “cuts in social spending and higher taxes are still the only way of reducing budget expenditures and a country’s sovereign debt.”



Yao Yang, director of the China Center for Economic Research at Peking University, weighed in at China Daily. He said that the US deficit problem “is ultimately the result of the conundrum of a welfare state following the capitalist system. Both are uncompromising ideals cherished by a substantial percentage of the population. The fight will resurface in the future even if the present deadlock is broken. There is a lesson for other countries here. The best a country can do is to fence off the contagious effects of such fights and rely more on the domestic economy for further growth.”

Also reprinted in China Daily, Mohamed El Erian, CEO of PIMCO, says, the next few weeks will provide plenty of political drama. “The baseline expectation, albeit subject to risk, is that Democrats and Republicans will find a way to avoid disruptions that would damage the fragile US economy, but that the compromise will not meaningfully address the need for sensible medium-term fiscal reforms.”

In Brazil, an article in Folha de São Paulo, the country’s largest daily newspaper, said that Americans woke up too late to its serious spending problems. Not only government spending, but consumer spending as well. A foreign correspondent for the paper interviewed US think tanks and scholars who said that the average US citizen was “uninformed” about the country’s economy and pending debt crisis. Despite having nearly every country south of Texas run into similar debt dead ends, the US — printers of the world’s reserve currency and the largest economy — didn’t seem to flinch when society, and government, became overweight with debt. The US is in a unique world situation because of its status as world’s reserve and trade currency, and issuers of the most trustworthy debt in the market.

“Americans are not well informed about the economic crises that occurred in other countries to learn from them,” said Isabel Sawhill, an analyst from the Brookings Institute in Washington. “They don’t see any parallels with crises in other countries because they think the US has the capacity to resolve all problems.
The population knows there is a problem, they just don’t know to what extent or where it comes from.”

Linda Bilmes, a former government consultant turned Harvard lecturer in Cambridge, the main problem with the debt deal is taxes and political ignorance over tax laws. “The biggest reason our debt is so high is because George W. Bush cut taxes two times exactly when we were spending money on two wars,” Bilmes told Folha. “In the last two major US wars, taxes went up to support those expenditures.”

See: White House, Congress Reach Debt Deal

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To Repay or Not to Repay Debts?

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Jean Pisani-Ferry

BRUSSELS – For months now, a fight over sovereign-debt restructuring has been raging between those who insist that Greece must continue to honor its signature and those for whom the country’s debt should be partly canceled.

As is often the case in Europe, the crossfire of contradictory official and non-official statements has been throwing markets into turmoil. Confusion abounds; clarity is needed.

The first question is whether Greece is still solvent. This is harder to judge than is the solvency of a firm, because a sovereign state possesses the power to tax. In theory, all that is needed in order to get out of debt is to increase taxes and cut spending.

But the power to tax is not limitless. A government determined to honor its debts at any cost often ends up imposing a tax burden that is disproportionate to the level of services that it supplies; at a certain point, this discrepancy becomes socially and politically unsustainable.

Even if the Greek government were to succeed shortly in stabilizing its debt ratio (soon to reach 150% of GDP), it would be at too high a level to convince creditors to continue lending. Greece will need to reduce its debt ratio considerably before it can return to the capital markets, which implies – even under an optimistic scenario – creating a primary surplus in excess of eight percentage points of GDP. Among advanced-country governments, none (except oil-rich Norway) has managed to achieve a durable primary budget surplus (revenue less non-interest expenditure) exceeding 6% of GDP.



This is too much for a democratic country, especially one where the tax burden is very unequally shared. Greece is, in fact, insolvent.

The second question is how serious a problem it is not to repay one’s debts.

One camp notes that, for decades, no advanced country has dared to do this, and that is why these countries still enjoy a positive reputation. If just one member of the eurozone embarked on the debt-default path, all the rest would immediately come under suspicion. In any case, according to this view, contracts simply must be respected, whatever the cost.

On the other side are those who call for the creditors who triggered the excessive debt to be punished for their imprudence. Lenders must suffer losses, so that they price sovereign risk more accurately in the future and make reckless governments pay higher interest rates.

Both lines of argument are valid, but the fact is that countries that have restructured their debt have not found themselves worse off as a result.

On the contrary, far from being banished from bond markets, they have generally bounced back quickly: investors like a sinner who returns to solvency better than a paragon of virtue on the verge of suffocation.

Twenty years ago, Poland negotiated a reduction in its debt and came off better than Hungary, which was keen to protect its reputation. Debt reduction is not fatal.

The third question is whether a Greek default would be a financial catastrophe – and when it should take place. Two channels are at work, one internal and one external.

First, government bonds are the reference asset for banks and insurers, because they are easily tradable and ensure liquidity. Obviously, any doubt about the value of such bonds could cause turmoil. The Greek banking system’s solvency and access to refinancing would be hit severely.

Externally, in turn, other European banks would be affected. But more importantly, other debt-distressed countries – at least Ireland, Portugal, and Spain – would be vulnerable to financial contagion.

So this is a dire situation. But it does not explain the European Central Bank’s attitude. The central bank has motives to be concerned. But instead of trying to find a way to cushion the possible impact of such a shock, the ECB is rejecting out of hand any sort of restructuring.

Indeed, it is raising the specter of a chain reaction by invoking the collapse of Lehman Brothers in September 2008, and threatening to punish any restructuring by cutting banks’ access to liquidity.

But if Greece is not solvent, either the EU must assume its debts or the risk will hang over it like a sword of Damocles. By refusing a planned and orderly restructuring, the eurozone is exposing itself to the risk of a messy default.

Europe, however, is not obliged to choose between catastrophe and mutualization of debt. The best route – admittedly a narrow road – is initially to beef up the financing program for Greece, which cannot finance itself on the market, while at the same time ensuring through moral suasion that private creditors do not withdraw too easily.

This is what is being attempted at the moment. But this breathing space must be used for more than simply buying time.

It should be used, first, to allow other distressed countries to regain or consolidate their financial credibility, and, second, to pave the way for an orderly restructuring of Greek debt, which requires preparation. Gaining time makes sense only if it helps to solve the problem, rather than prolonging the suffering.

Jean Pisani-Ferry is Director of Bruegel, an international economics think tank, Professor of Economics at Université Paris-Dauphine, and a member of the French Prime Minister’s Council of Economic Analysis.