Ireland's Looming Consumer Credit Crisis

Wednesday, January 27 2010

Owing more than €180bn Irish people are the most indebted in Europe and recognised as being the most financially vulnerable.

FOUR out of ten people people surveyed last year said they had problems meeting their financial committments in the previous six months and expected to have problems within the next six months. Only 2% said they felt financially secure. These findings are a far cry from 2007 when Irish people were reported as the most financially secure of the 14 Euro states surveyed.

Personal borrowings stand at over €180bn made up of about €147bn in mortgage loans and over €33bn in other loans. Just how many people are experiencing problems making their loan repayments is hard to know as neither the Government nor its agencies publish data on how bad the consumer debt crisis is becoming.

Yet there are some figures that illustrate how bad things are becoming. Ratings agency Moody's recently highlighted growing arrears on securitised mortgages. These are loans lenders have packaged and sold to international investors through what are called Residential Mortgage Backed Securities. Yet another ratings agency, Standard & Poors has downgraded Irish bank ratings citing its concerns that their bad debts will worsen.

Banks mortgage loan arrears have risen by over 300% since early 2008. As people prioritise mortgage payments, mortgage arrears are lag indicators. Which means the situation with unsecured personal loans is probably far worse. Some other signs include credit unions bad debts which have more that doubled in 2008 with some reporting that 10% of their loans are in difficulty. Meanwhile car auction rooms are full of repossessed cars being sold at knock down prices indicating significant problems for Ireland's car finance companies.

Media reports have highlighted the numbers of people seeking mortgage interest subsidies. Reported at 1000 new applications a week it illustrates not only worsening arrears but rising unemployment as the subsidy can only be claimed by people of work.

But headline data and media reports are merely the tip of the iceberg of debt people and families are struggling with. MABS, the state funded money advisory and budgeting service reported record numbers of people looking for help with their debts. Designed to service those who are financially excluded and on low incomes it's offices have been inundated by people referred to it by banks, credit iunions and finance companies.

The airwaves are full of people talking of their experiences in dealing with the stress of debt collectors phone calls, threatening letters and court appearances as creditors escalate legal debt collection processes. Designed for the 19th Century, Irelands laws have remained largely unchanged since the Dickensian era of debtor prisons.

Despite repeated calls for a fairer debt settlement system people could still be imprisoned for not being able to pay court ordered instalments to people they owed money to in 2008. Thankfully, last year, a minor change means that only those who are unwilling but able to pay will face prison time. Yet this will not stop creditors using the legal system to collect debt.