Spending-time in the East

By Teresa Küchler

Date: 16/06/05

Eastern Europe is a young, green and thirsty credit market. And credit companies are clamouring to quench the demand.

Despite the risk of repayment defaults and bad debts and the lack of trustworthy data on borrowers' records, the EU's Eastern frontier is a potential gold-mine for firms focusing on low-income households and unsophisticated consumer credit sectors.

In the Baltics, the use of credit cards is booming. Experts put this down to a combination of steadily rising salaries and newly awoken trust in financial institutions. Decades of corruption and the bankruptcy of several banks at the beginning of the 1990s led to huge personal financial losses and made people reluctant to trust financial institutions. In 2000 there were 1,000 Visa credit cards in Lithuania. In 2004, there were 12,000 Visa customers - an increase of 384% on the year before.

Natalja Titova, an analyst at the economic research unit of the AB Bankas NORD/LD bank in Vilnius, says: "In the last four years the consumer credit in Lithuania has doubled each year. But one must bear in mind that the starting point was more or less zero. The living standard of ordinary people is growing fast, national income growth is approximately 10% per year, and the conditions for household credit are favourable."

In Lithuania three banks dominate the credit market, and the price war between them has created attractive terms for borrowers wanting the lowest possible interest rate. But in comparison to more developed European countries, Lithuanian consumer credit levels are low.

Despite a slow-down in consumer borrowing from the beginning of this year, the UK is the most indebted population in Europe. The UK accounts for 30% of the total consumer credit market in Europe and has the largest credit card market in Europe with two credit cards for every three adults in the country. Total personal debt in the UK is expected to break through the £1,100 billion (1,600bn euro) barrier in July 2005 and is increasing by £1 million (1.5m euro) every four minutes.

According to a survey from 1 June, commissioned by the British government, indebted British citizens are typically in their twenties and thirties with children, live in rented accommodation and have an income of less than £9,500 (14,200 euro) a year. Almost 10% of the participants in the survey admitted to spending more than half of their income on unsecured credit payments. Loans, the survey revealed, are typically financed with new loans.

UK Consumer Affairs Minister Gerry Sutcliffe says: "Over-indebtedness can cause huge problems for individuals, which is why we are currently working hard to minimise the number of people who become over-indebted, and improve support for those who have fallen into debt. However, it is encouraging to see that, despite an increase in consumer borrowing, the percentage of those who find their debts unmanageable is still relatively small."

In the long run, if British borrowers decided to use more of their household income to repay old loans, or take out new loans to finance old, it could have a slow-down effect on consumption.

Geraldine Kilkenny, head of research and statistics for UK consumers' organisation Finance & Leasing Association (FLA) detects a change in UK attitudes.

"The stigma of being indebted is gone, and up to recently, people took out loans without second thoughts. But there have been several rises in interest rates over the last few years, and it has started to have an effect on consumer borrowing. People have become more cautious," she says.

The Swedish Prime Minister Göran Persson sees debt as a burden. He who is in debt is not free is the title of his book from 1997. But the Swedes turn a deaf ear to such advice and the Scandinavians as a whole do not see reasons not to borrow. Political stability encourages consumer confidence and rising salaries together with government expansionary policies - lower taxes and higher subsidies - make household incomes reliable for lenders.

But in the heartland of the eurozone, in and around Germany, consumers hold on to their wallets and are slow to wield plastic - even if they have a credit card. High unemployment rates, cutbacks in social welfare and slow growth have harmed consumer confidence. Germans - the squirrels of Europe - are afraid to borrow and consume. Instead, the trend, from Aachen in the west to Dresden in the east, is to save as much as possible from earnings. The saving rate for last year was as high as 10.5%, with most of the cash placed in regular bank accounts and insurance policies.

Earlier this month, Jean-Claude Trichet, the president of the European Central Bank, said that in order to boost consumers' confidence in Germany and elsewhere, it was necessary to go shopping. "It is time to consume," he said.

But hopes of a consumer-led revival in the fortunes of the eurozone will not be realised until the mood changes in Germany and France.

Elsewhere in the eurozone, consumer credit is escalating. In Greece, most of the real estate is owned without mortgages and loans, so Greeks feel at ease with borrowing money for consumption. Last year consumer credit increased by 39%.

Sadly for Trichet, the Greek economy is too small to revive the fortunes of the eurozone.

Article takes a look at levels of personal debt and savings in EU Member States and their effect on the economy.