Research & Commentary

Forget About the Check, We’ll Get Hell to Pay

Britain looks increasingly vulnerable to debt deflation.

As the majority of Britons excitedly followed England’s progress in the World Cup during the warm weather of June and July, many of them would have been buying barbeques, food and beverage on credit card. As they enjoyed their parties, quite a number may have been thinking of the title to this article — the immortal line from AC/DC’s “Have a drink on me.” You see, Brits are increasingly defaulting on their credit card debt.

The most recent Bank of England Credit Conditions survey highlighted a “significant increase” in defaults on credit card loans. Credit card defaults were the main reason why defaults on unsecured lending surged in the second quarter of 2018. Lenders expect a further increase in default rates for total unsecured lending in the third quarter.

The Bank of England has been increasingly concerned with the level of unsecured debt in the U.K., the highest it has been since 2008. Increasing interest rates would make it harder for those in debt difficulties. Most economists expect the Bank to increase interest rates at its 2 August meeting and the Overnight Indexed Swap market currently prices a 79% probability of a hike. However, we’re not so sure that the Bank will move on rates, given that 3-month and 2-year market interest rates are below their April peaks. Remember, central banks follow the market’s lead.

The chart below shows U.K. household debt as a percentage of disposable income. It has been deflating since topping out at 155% in 2008, but it remains at historically elevated levels. England football supporters may be feeling deflated after losing in the semi-final of the World Cup. Expect debt markets in the U.K. to join them.

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