A surge in household borrowing is paving the way for another financial crisis, according to the International Monetary Fund.
In a hard-hitting report published ahead of its annual meetings in Washington this week, the watchdog warned of ‘risks down the road’ from rising levels of debt.
And raising the prospect of a new financial disaster, ten years on from the last, the Fund said: ‘Higher household debt is associated with a greater probability of a banking crisis, especially when debt is already high.
A surge in household borrowing is paving the way for another financial crisis, according to the International Monetary Fund
‘A sudden economic shock – such as a decline in home prices – can trigger a spiral of credit defaults that shakes the foundations of the financial system.’
The intervention will set alarm bells ringing among central bankers and top politicians as they prepare for this week’s gathering at the IMF headquarters in Washington.
The bleak warning comes amid mounting concern over rising debt levels in the UK. Household debt levels fell as a proportion of national income in the UK following the financial crisis, from around 150 per cent to 130 per cent, but they have surged back to 137 per cent over the past two years.
The Bank of England’s latest figures show British households have racked up unsecured debts of £203 billion on credit cards, car finance, overdrafts and other loans.
Central bank officials now fear UK lenders could lose £30 billion in the next downturn as heavily indebted borrowers struggle to pay back what they owe
Central bank officials now fear UK lenders could lose £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,’ said IMF economists Claudio Raddatz and Jay Surti.
‘Periods of robust growth and seeming calm in financial markets can be followed by a sudden surge in market volatility and an unexpected economic downdraft.’
Fellow IMF official Nico Valckx said economies can initially benefit from rising levels of household debt as the extra spending boosts the economy.
But he warned risks then begin to mount.
‘Debt greases the wheels of the economy,’ Valckx said. ‘It allows individuals to make big investments today – like buying a house or going to college – by pledging some of their future earnings. That’s all fine in theory.
‘But as the global financial crisis showed, rapid growth in household debt – especially mortgages – can be dangerous.’
The IMF warned that households were binging on debt once again as memories of the last financial crisis faded.
‘Given the misery the crisis caused, you might think people have become skittish about borrowing more,’ said Valckx. ‘Surprisingly, that’s not the case.’
Can the Tories fix housing, energy bills and student debt?
Forget coughing fits, pranksters and tumbling letters for a minute. Along with a car crash speech for Theresa May, the Tory party conference also brought a few policies that might make a difference to our financial lives.
Student fees, housebuilding and an energy price cap all came up on the agenda.
On this week’s This is Money podcast, Simon Lambert, Georgie Frost and Laura Whitcombe take a look at whether this is just tinkering around the edges, or a solid plan to improve three highly controversial areas?
To listen to that and the everything else you need to know about money this week, press play for the full episode below, or listen (and please subscribe if you like the podcast) at iTunes, Acast and Audioboom or visit our This is Money Podcast page.