By Matthew Lynn
Nov. 13 (Bloomberg) -- Everyone knows that the U.K. has become a nation that binges on credit. It is also one that isn't paying back its debts either.
Defaulting on loans has become a guilt-free exercise. At some point, the U.K. will regret it. The principle that borrowed money has to be returned is central to a free-market economy. If it isn't taken seriously, people won't want to lend money anymore -- and then the economy will be in real trouble.
``It would be wrong to say that bankruptcy has become easier in reality, but it has certainly become a lot more acceptable to a segment of the population,'' James Falla, managing director of consulting firm Thomas Charles & Co. in London, said in a telephone interview. ``Young people in particular seem a lot less concerned about it than they once were.''
Indebtedness in the U.K. is growing rapidly. So are the numbers of people who are getting into trouble because they have borrowed too much.
Overall, the British now owe a hefty 1.3 trillion pounds ($2.5 trillion). Some of it is borrowed against their houses, which fortunately are still going up in value faster than the debts secured on them. A lot of it, however, is attributed to credit-card obligations and bank overdrafts.
One in five adults has unsecured debt of more than 10,000 pounds, according to a Thomas Charles survey. And British banks were owed 215 billion pounds in unsecured debt last year, accounting for a third of all the consumer debt in western Europe, according to Datamonitor.
100,000 People
Many people are struggling to cope. Individual insolvencies rose 5.7 percent to 27,644 in the third quarter, the highest figure since records began in 1960, according to government statistics. It now looks certain that the total number of individuals declaring themselves bankrupt will top 100,000 annually, the equivalent of a city the size of Exeter going bust.
Meanwhile, more people are also finding it impossible to keep up the payments on their mortgages. Courts authorized 24,017 orders in the third quarter for mortgage lenders to repossess the properties of defaulting owners, the highest since 1993, according to the Constitutional Affairs Department.
It is important not to be too puritanical about debt. The willingness of ordinary consumers to borrow and spend has helped the U.K. economy to keep growing at a faster pace than most of its main European counterparts.
People aren't necessarily poor judges of their financial prospects. Unemployment remains low in the U.K. -- it was 3 percent in September. Most people who want a job can get one. And house prices keep on rising, so most homeowners are sitting on a significant asset. There is nothing wrong with resorting to credit so long as your overall balance sheet is in good shape -- as any private-equity firm will point out.
Interest Rates Rise
Still, there are causes for concern about the current binge.
First, the debts have been taken on while interest rates have been exceptionally low. That is starting to change. The Bank of England has just raised borrowing costs to 5 percent, the highest level since September 2001.
So if interest rates rise much more and the economy falters, many borrowers will be in trouble -- after all, 100,000 people are already declaring themselves bankrupt. ``The trend is undoubtedly still upwards and with further rate rises likely the IVA/bankruptcy problem is likely to continue to grow,'' UBS AG said in a recent analysis, referring to so-called individual voluntary arrangements. Goldman Sachs Group Inc. has advised its clients to sell U.K. banking stocks because of the rising tide of bankruptcy, the Independent newspaper reported last week.
Unmanageable Repayments
More importantly, the sanctions on debt have gradually been eroded. The bankruptcy boom reflects an increase in individual voluntary arrangements, a form of insolvency that allows people to make agreements with creditors to restructure debt repayments that have become unmanageable.
IVAs, as they are known in the trade, are a booming business. Type IVA into
http://www.google.co.uk and one of the first results you get proclaims, ``Serious Debts?...Up to 95% of debt can be written off!'' There are plenty more in a similar vein. So the message is clear: If your debts are too burdensome, you can just walk away from them.
That is troubling.
Nobody would want to go back to the world of Charles Dickens's ``Little Dorrit,'' where people were condemned to spend the rest of their lives in a prison for debtors because they owed a few pounds to someone.
Still, just as the Victorians were probably too harsh in many of their moral judgments, we are today too easygoing.
After all, lending isn't incidental to the economy. A system for transferring money from people who temporarily have too much of the stuff to people who don't have enough is vital to making it work. It is one of the reasons we are so prosperous.
No Assets, No Debt
There are, of course, still sanctions. You can lose your house or your car if you go bankrupt. Yet for that section of society that doesn't own property, or any significant assets, running up debt and reneging on it can be an attractive option.
The trouble is, people will only lend money if they are reasonably confident of getting it back. For that to happen, there needs to be a disincentive for payment failure.
In time, Britain may realize it has gone too far in making debt default so easy. Lending may dry up -- and then the whole economy would grind to a halt.
http://www.bloomberg.com/apps/news?pid= ... refer=home
