The International Monetary Fund (IMF) has warned of a surge in household debt which could pave the way for another financial crisis, ten years on from the last one with the possibility that the rising levels of debt could lead to a sudden economic shock.
A recent published report states “higher household debt is associated with a greater probability of a banking crisis, especially when debt is already high. A sudden economic shock, such as a decline in home prices could trigger a spiral of credit defaults and debt that shakes the foundations of the financial system.”
The IMF’s bleak warning comes following concerns over rising debt levels in the UK. Following the financial crisis in 2007, household debt levels fell as a proportion of National income in the UK, from 150% to 130%. However, debt levels have surged back to 137% over the past two years.
The Bank of England’s latest figures have shown British households have unsecured debts of £203 billion on credit cards, car finance, overdrafts and other loans.The Bank has expressed concerns that UK lenders could lose over 30 billion in the next downturn as heavily indebted borrowers struggle to pay back what they owe.
“Growing debt levels signal risks down the road” states IMF Economist Claudio Raddatz. IMF Economists state that economies can initially prosper from rising levels of household debt as the extra spending boosts the economy. However, as spending and debt increase the risks begin to increase also.
IMF Economist Nico Valckx states “Debt greases the wheels of the economy. It allows individuals to make big investments today, like buying a house or going to college, by pledging some of their future earnings to pay the debt incurred. That’s all fine in theory. But as a global financial crisis showed, rapid growth in household debt, especially mortgages, can be dangerous”.
The IMF is giving a warning that spending and debt is getting out of control. It is stating that householders are binging on debt once again and history may be about to repeat itself as memories of the last financial crisis fade.
The report goes on to summarise the position by stating that the lessons of the last financial crisis and the misery that is caused may not have been learned. It states that people should be more wary about taking on more borrowing and debt but it believes people simply haven’t got this message.
Whether the IMF’s concerns about rapidly rising household debt will lead to another bubble and subsequent financial crisis remain to be seen.
If you are struggling with debts, it is vital you speak to a personal insolvency solicitor at the earliest opportunity. Call Farleys Solicitors on 0845 287 0939 or send your enquiry online.