Loan defaults up almost 30%

September 14, 2007 - 11:49AM

Loan defaults rose by almost 30 per cent in the last financial year with failures to pay the bills on time up in every Australian state and territory, figures from the nation's biggest credit check firm have revealed.

And economists say consumers who haven't experienced a recession are upping their borrowing to levels more than double their income because they are confident the good economic times will continue.

The Australian Law Reform Commission (ALRC) has recommended credit check companies be allowed to tell the banks more about consumer credit files in a bid to stop lenders giving people loans they can't afford.

Veda Advantage has revealed that defaults - where bills are not paid for 60 days - went up by 28.6 per cent in the 2006/07 financial year.

Veda's head of external affairs Chris Gration said the data showed consumers were increasingly facing debt stress.

Veda declined to release the actual number of new defaults in the past financial year but 12.4 per cent of its 14.5 million credit files across Australia have a list of defaults or personal bankruptcies.

That translates into 1.8 million struggling consumers - about the population of Brisbane.

"I guess for us, what we're seeing is we look like we're entering a period of increased financial stress for a significant number of consumers," Mr Gration said.

"In that context ... lenders need better credit risk information.

"At the moment, if a consumer goes into a bank and they are financially stressed, they may not disclose the debt they have."

Access Economics director and chief economist Chris Richardson said consumer incomes were growing at an annual rate of six per cent a year, because of better returns from capital gains and shares, but their total borrowing was increasing by 15 per cent.

"In the 1980s, it (borrowing stress) was because interest rates were through the roof, now it's because borrowing is through the roof," he said.

"The people doing the borrowing haven't seen bad times so they're mentally unprepared for them."

Consumer Credit Legal Centre NSW co-ordinator Karen Cox said the lack of information available to lenders was not the sole cause of the jump in defaults.

Ms Cox said giving lenders more information about our credit history would make it easier for non-banker credit providers, in particular, to sell more credit to existing customers and encourage them to consolidate their loans.

"Yes, if they had more information they could lend more responsibly but on the other hand they may not," she said.

Veda's data showed the biggest defaults rise was in Tasmania with a 59 per cent increase in the last financial year.

The Northern Territory posted a 49 per cent rise in defaults, followed by Western Australia where the figure was 44 per cent higher and Queensland which recorded a 41 per cent increase.

Defaults were up by 40 per cent in New South Wales, 35 per cent in South Australia and the Australian Capital Territory but only 10 per cent in Victoria.

Ms Cox said 60 per cent of people who had contacted the legal centre about their debts had only one credit card, a survey of 2,500 people in 2006 found.

"It was about getting too much credit in proportion to their incomes as opposed to the credit providers not knowing about their other liabilities," she said.

The ALRC recommended in a discussion paper this week that credit check firms be allowed to tell banks and other lenders the dates a credit account was opened and closed and the borrowing limits.

The review paper into the Privacy Act of 1988 did not call for lenders to be allowed to know how much a consumer owes.

Under existing laws, credit check firms can tell lenders about a customer's previous applications for credit and whether someone has defaulted in the past five years.

Don't mention the debt
Michael West
February 19, 2009 - 3:20PM

Our overseas borrowing is the great unspoken. It is the one subject assiduously avoided in public by Kevin Rudd, Malcolm Turnbull, Ken Henry, APRA, the Reserve Bank and the big banks. They probably even gloss over the matter when chatting privately among themselves.

It is Australia's Ponzi scheme. Bernie Madoff goes to Bondi. We keep getting those foreign dollars in while sending plenty out, but never quite as much, hoping no one will blow the whistle lest the whole game end.

Same deal in the US, though far more menacing.

Our economy, like the US, UK and many in the developed world, is a chronic current account deficit nation, splashing year-in year-out on the national credit card and hoping the global bank keeps increasing the limit.

What is the limit? We don't know that, yet. Yet surely it must be tested one day.

And in light of the recent developments in the US and particularly in Austria and Eastern Europe, that day may arrive sooner rather than later. It is as close as a foreign lender or two saying, no thanks, we've got enough of that, can't take any more.

Batt man

Let's put the Federal Government's stimulus package in perspective. Kevin Rudd reckons $42 billion will stimulate the economy through the hard months ahead, which it will to a point.

Crying Whitlam and Khemlani, Malcolm Turnbull reckons the package is simply more dollars borrowed from tomorrow to fund us today, which it is. It could be better spent.

Some will dissipate in dingy pokie parlours and in a frenzy of pink batts which, once domestic capacity is reached and the foreign pink batt players have sorted every house in the country, will leave a couple of barren pink batt factories.

To get to the point, fiscal stimulus is better than nothing. It will have some effect. Still, as a vision for the economic future it is akin to staring wistfully at the kitten in the room while ignoring the rogue elephant glowering behind it.

Looking at the numbers, according to the Australian Bureau of Statistics we have about 21,374,000 or so people living in this country. Our combined national debt (taking all government, personal, private and business debt into account) is $2.32 trillion ($3.4 trillion including equity) as of September last year - and growing. A falling Aussie dollar makes it more expensive to repay, or roll over.

Each and every Australian then, including babies, accounts for foreign borrowings of nearly $110,500 dollars. If we use the same method to calculate what the cost of Prime Minster Rudd's ``stimulus package'' is to the nation, we end up with a cost of nearly $2,000 per head.

Inching to the edge

To put it another way, says macroeconomic consultant Mark Beavan, Kevin's rescue package is increasing the nation's net debt by little more than 1%.

''Malcolm might happily forget that while his former government colleagues were steering the good ship Australia, the nation's total debt soared from a mere $700 billion in 1997 up to $3.2 trillion by the close of their term. An increase of 387%''.

Deregulation brought growth alright. But there is a yin for every yang. The Opposition may well brag that it left office with zero debt - zero government debt that is - as the upshot of policy was to lump it onto the consumer.

That is something the nation has to live with for a long time. In the meantime, it will do the sovereign credit rating no favours.

''In the fluid deregulated markets, the government (past and present) didn't think for a second about regulating the extent and rate at which the nation got itself into debt,'' says Beavan.

''It is too hooked on the drug of national economic growth for economic growth's own sake and refuses to allow the dream of many Australians (who still believe that housing prices can only go up) to be punctured along with our economy''.

Inflating house prices

Beavan believes that if all that debt were stripped away, irrespective of land shortages, property prices would be half to two-thirds of what they are today. ''If homebuyers don't have money on loan from the banks, then they could not afford to pay the higher housing price - so the price would have to fall or the market would stagnate''.

''Why did we not index the rate of debt growth (15% per annum compounding for the last 12 years straight) to that of the country's economic growth (less than 3% when the debt is stripped out)? Surely a lending system predicated on genuine national economic growth would be a far more practical solution?''

If governments had constrained debt growth, bank profits could not have kept growing at 15% a year. Or executive salaries at 30% for that matter. (Not to mention state stamp duty revenues.)

Bank binge

It is no coincidence that the banks' profit numbers match the growth in national debt.

As the banks have racked up their record profits they have come at a price, but that price is yet to be crystalised. Anecdotal evidence suggests loan-to-valuation ratios of 90% are still on offer so the banks are keen to keep the residential mortgage-growth dream alive.

Against the backdrop of consumer debt at 174% of GDP (down slightly from its record high of 176.9% last May) is the spectre of banks not being about to roll their wholesale funding offshore.

On the ABS numbers for September (the December lot will be interesting), there is $654 billion of net debt owed to overseas parties - banks and others who have problems of their own.

The December quarter numbers will show a sharp increase over September. In little over two months the Aussie banks have run wild with the government guarantee on wholesale funding, raising some $50 billion - or half of their estimated $120 billion in wholesale funding needs for the year.

The average size of borrowings is up threefold and the rush is widely put down to the view that there is a fair risk of global credit markets icing over once more. Better soon than never is the gameplan.

The pricing of the issues has improved since the guarantee was brought in and overall the demand for Australian bank paper is a vote of confidence in the banks and the system. Indeed, racked up against the sorry state of most western banks, our banks are killing it.

Wipe-out

A report from Boston Consulting group released last night estimated the global financial crisis has wiped some $US5.5 trillion from the market value of the world's banks, equivalent to 10% of global GDP.

The banking industry's market value fell $US4 trillion by the end of 2008, and shed a further $700 billion in the first three weeks of this year.

While US banks drop like flies and UK banks lapse into the hands of government, they are still producing loan growth before bad loan write-downs, and profits of $4 billion-plus per year.

Look no further than Westpac's $1.2 billion in cash earnings for the December quarter delivered yesterday. Revenue growth remained strong. Westpac, along with the rest of the Big Four are still pumping out the loans. Chief Gail Kelly conceded consumer delinquencies were on the rise, but the quantum is yet immaterial.

Thanks to the other government guarantee, the deposit guarantee, the banks have prevailed at the expense of non-bank institutions following a flight to safety last year. Bulking up their deposit-bases has also protected them, delivering far greater domestic funding.

Another 'D' word

Still, the worst is to come. The level of unemployment will largely determine the degree of mortgage defaults. Meanwhile, the great unspoken, the national debt, will continue to remain unspoken.

The monthly RBA bulletin was released today. A couple of countervailing trends: outstanding balances on credit cards were up from $44.7 billion to $45.2 billion, while growth in personal loans is down.

According to Professor Steve Keen, who keeps a close watch on Australia's debt situation (and is particularly bearish on the economy) these figures are evidence of people being cautious on taking on new debt but sufficiently hard-up they are not paying down their credit cards.

When it comes to indebtedness, on Keen's numbers Australia ranks third behind the UK (with household debt to GDP at an astounding 240%) and the US (180%). Australia's ratio has come back to 174.2% now. It is still way too high.

And it should be borne in mind asset values have been declining, so debt to equity ratios are going through the roof.

All this makes for a monumental challenge for the Government and the big banks.

Both have managed the crisis reasonably well until now but the cycle is likely to deteriorate from here and the big unknown is the potential for a foreign debt crunch.