European Consumers Discover Easy Credit
North American enthusiasm for consumer credit is catching on in Western Europe, with the British showing the greatest zest for running up personal debt.
Throughout Western Europe more people are tending to borrow rather than pay cash. Italy, for instance, a staunch bastion of cash transactions, is to have its first credit card.
In Britain, an era of fierce competition among banks, building societies (savings and loan associations) and retailers means that they are showing unprecedented generosity to the borrower.
An Englishman buying a house can often borrow all but 5% of the price, up to as much as three times his income. Credit cards have proliferated.
“Easy credit. No need to pay until next year,” say glossy ads for new luxury bathrooms.
Total household debt, in home loans, retailer and other credit, now equals about 85% of total income in Britain--roughly the same as the United States. The percentage is up sharply from about 55% in the 1970s.
The beginnings of a potential social problem are evident, with British court actions over unpaid debt up by one-third from 1983. Home-loan defaults have doubled since then, and Robin Leigh-Pemberton, governor of the Bank of England, has warned banks and others against “unwise” lending standards.
Shouldn’t Strain System
Few economists think the dimension of personal debt on either side of the Atlantic threatens the sort of strain on the banking system that is exerted by the Third World debt crisis.
Tax reforms expected to be signed into law this month in the United States will end tax breaks on consumer interest payments and may curb such borrowing.
Reuter correspondents who polled bankers and officials in other major West European economies found that, among thrifty West Germans, the French and the Italians, few had debt problems even though the role of personal credit was generally expanding.
The Britons who get into trouble, lenders report, are often young newlyweds who borrow heavily to buy a home in a nation where home ownership is encouraged by a Conservative government. Then, the costs of having a baby, static or reduced earnings or unemployment make monthly repayments difficult to meet.
The present borrowing generation of West Europeans grew up in an era of high inflation, when rising wages could be trusted to make a large loan much less painful within a year or so. It is now discovering the implications of low inflation.
Banking officials in Paris, for instance, where housing prices are higher than elsewhere in France, said a rising number of young people were in trouble there. They had taken out home loans when inflation was high, under schemes calling for progressively higher repayments. Salaries had not kept pace.
The French sources said it was much more difficult to borrow in France than in Britain or the United States. But they added that competition was increasing, and some banks might lower standards to woo customers.
Incentive Is Strong
Throughout the Western economies, the banks’ incentive to lend to ordinary men and women is strong. Few want to lend to the Third World. Corporations are making high profits after a period of retrenching, and those that need capital tend to issue securities rather than look for bank loans.
Deregulation of financial markets is meanwhile admitting foreign banks to national economies.
Italians, said a spokesman of the Italian Banking Assn., are “by tradition savers rather than borrowers.” Almost all transactions in Italy are done in cash, and large down payments are required on home loans.
But Italian banks are now competing harder for personal and home loan business, offering credit packages for anything from a bridal trousseau to a house, and plan to issue the first Italian credit card--called Cartasi or the “yes” card.
In West Germany, a study by the Max Planck Institute found that every second West German household had some form of credit. Two-thirds of all cars in West Germany are bought on credit. But savings in most instances outweigh debts.
About 19 million out of 22-million West German workers have wage agreements that include special savings schemes with employer bonuses. The state even makes up bonus payments on savings by the lowest-paid.
Private savings average about $5,000 per household. Total outstanding consumer credit in June, 1986, stood at about $90 billion, against more than $1 trillion of assets.
Even in Britain, consumer assets exceed debt.
Economists, however, say that assets are locked up in pension funds or life insurance. And if debtors had to sell assets such as homes on a big scale, values would fall.
On the other hand, competition to lend is matched by competition in the finance industry for investors’ money, resulting in the development of more sophisticated and flexible instruments in which assets can be held.
