3 August 2009 | Published by Datamonitor

International body claims UK will be particularly hard hit as it warns of potential European losses of over £100bn.

London. The International Monetary Fund issued a warning earlier this week that Europe would soon be hit with a credit card crises triggered by rising rates of default. The IMF warns that up to 7% of Europe’s total £1.49 trillion of consumer debt may go sour as a result of the economic downturn, equivalent to £104bn. The US will see up to 14% of its £1.16 trillion in consumer debt be written off, a total of £162 billion. The UK is singled out to be the hardest hit by these rising rates of default in Europe having the highest levels of credit card borrowings in the region.

UK default rates are likely to see a further increase in the near to mid term as unemployment continues to grow. While frequently touted as a first green shoot of recovery, any slow down in growth in unemployment will not offer any respite from rising rates of default. UK charity National Debtline also reports that the number of calls it receives has doubled to 41,000 over the same time the previous year.

The latest available data from Moody’s suggests that annualised charge-off rates have risen from 6.4% of UK card loans in May 2008 to 9.37% in May 2009. In the US the rate is currently above the psychological barrier of 10%. Some of the biggest US banks have been hard hit with Citigroup, Bank of America, JP Morgan Chase and most visibly American Express suffering billions of dollars in losses.

Gilles Ubaghs*, cards payments analyst with Datamonitor says: “As the cliché goes when America catches a cold Europe sneezes. Early indications suggest Europe and the UK in particular are about to be hit by the tidal wave of defaults that have afflicted US card issuers.” In what is a further worrying sign, US rates of default appear to be decoupling from unemployment, suggesting that as consumers are increasingly squeezed by a loss of equity in the housing market, and wage growth remaining flat, even employed cardholders are beginning to default.

Ubaghs observes: “Issuers including Barclaycard are already reporting growing losses due to defaults. This poses a particularly difficult problem for the now largest UK cards market player Lloyds Group. It will have to absorb any future losses in its cards portfolio as it has not been able to include cards loans amongst the £260bn it has insured with the UK government.”

With such losses to absorb, this suggests tighter credit scoring and lower rates of issuance will remain a key feature of the UK cards market for the foreseeable future. Ubaghs concludes: “The sector is unlikely to receive much public sympathy or support and as such it remains critical that card issuers remain very careful in balancing their level of exposure to potential risk while not limiting their much needed potential for growth.”

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