09-04-2007, 08:44 PM
CREDIT CARD DEFAULT-
THE DOMINO CRISIS POST SUB-PRIME OVERFLOW
ATCA
Now that homeowners are increasingly unable to use the collateral of their homes as an easy to reach hole-in-the-wall, they are likely to dig into the next best alternative they have available, their arsenal of credit cards. Fears are mounting that credit card debt could soon spark a fresh crisis in the global financial system. Households struggling to meet the soaring interest costs on their mortgage payments are increasingly using their credit cards to service and to pay their debts in the short term. This could put credit card repayments under pressure alongside mortgage payments.
Hundreds of billions of dollars, euros and pounds in credit card debt run up by every major card provider have been sold off to the capital markets in recent years. Many of these securitised debts are held in Collateralised Debt Obligations (CDOs), the controversial securities that have been involved in the recent credit crunch associated with the sub-prime mortgage market. If consumers begin to miss payments on credit cards, many of these CDOs could begin to lose their value and have their credit ratings significantly cut as well. Given that those CDOs have been used as collateral against other debts in the market, that could spark a fresh bout of further loss-of-trust domino effects and unwelcome contagion in a jittery market.
The latest figures from the US Federal Reserve show that consumers increased their amount of outstanding revolving credit -- mostly credit-card debt -- by USD 6.3 billion in June to a total of USD 904 billion. Total c onsumer debt in Britain exceeds USD 2.7 trillion (GBP 1.3 trillion) -- a number comparable to UK's GDP -- including more than USD 100bn (GBP 50bn) on plastic credit cards. Clearly, the subprime market is not the only unstable sub-section of the credit market. Once consumption slows, there is a crisis likely in credit card and car finance CDOs amongst other securities. In both cases, defaults on payments have already risen sharply. Further, o nce corporate bankruptcies start to rise again as the cycle turns downwards, both in the US and in Europe, we are likely to note problems with Collateralised Loan Obligations (CLOs).
Bank of England data last week showed that British banks have written off USD 18bn (GBP 9bn) in bad debts in the past 12 months, a year-on-year increase of 20 per cent and the highest figure since records began 16 years ago. Research last week from Moody's, the credit rating agency, suggests that American credit card companies have seen bad debts jump by 30 per cent year on year. Late payments have also risen significantly. The omens are not looking good as credit conditions in money markets tighten enormously. M any credit card companies are responding swiftly by raising their interest rates from 9+ percent up until recently to 15+ percent annually . In many cases, the new rates are much worse at 20+ percent. This significant ratcheting up of interest rates on credit cards by 5 to 10 percent impacts the disposable income of consumers and families considerably, and by a much greater margin than originally envisaged by the borrower.
Since the concatenated risks in credit markets are deeply intertwined, they display significant potential for black swans, ie, unknown unknowns, and the unruly manifestation of systemic risk without notice and with wide contagion. Fasten your seat belts, the heightened market volatility is far from over and may climb further.
THE DOMINO CRISIS POST SUB-PRIME OVERFLOW
ATCA
Now that homeowners are increasingly unable to use the collateral of their homes as an easy to reach hole-in-the-wall, they are likely to dig into the next best alternative they have available, their arsenal of credit cards. Fears are mounting that credit card debt could soon spark a fresh crisis in the global financial system. Households struggling to meet the soaring interest costs on their mortgage payments are increasingly using their credit cards to service and to pay their debts in the short term. This could put credit card repayments under pressure alongside mortgage payments.
Hundreds of billions of dollars, euros and pounds in credit card debt run up by every major card provider have been sold off to the capital markets in recent years. Many of these securitised debts are held in Collateralised Debt Obligations (CDOs), the controversial securities that have been involved in the recent credit crunch associated with the sub-prime mortgage market. If consumers begin to miss payments on credit cards, many of these CDOs could begin to lose their value and have their credit ratings significantly cut as well. Given that those CDOs have been used as collateral against other debts in the market, that could spark a fresh bout of further loss-of-trust domino effects and unwelcome contagion in a jittery market.
The latest figures from the US Federal Reserve show that consumers increased their amount of outstanding revolving credit -- mostly credit-card debt -- by USD 6.3 billion in June to a total of USD 904 billion. Total c onsumer debt in Britain exceeds USD 2.7 trillion (GBP 1.3 trillion) -- a number comparable to UK's GDP -- including more than USD 100bn (GBP 50bn) on plastic credit cards. Clearly, the subprime market is not the only unstable sub-section of the credit market. Once consumption slows, there is a crisis likely in credit card and car finance CDOs amongst other securities. In both cases, defaults on payments have already risen sharply. Further, o nce corporate bankruptcies start to rise again as the cycle turns downwards, both in the US and in Europe, we are likely to note problems with Collateralised Loan Obligations (CLOs).
Bank of England data last week showed that British banks have written off USD 18bn (GBP 9bn) in bad debts in the past 12 months, a year-on-year increase of 20 per cent and the highest figure since records began 16 years ago. Research last week from Moody's, the credit rating agency, suggests that American credit card companies have seen bad debts jump by 30 per cent year on year. Late payments have also risen significantly. The omens are not looking good as credit conditions in money markets tighten enormously. M any credit card companies are responding swiftly by raising their interest rates from 9+ percent up until recently to 15+ percent annually . In many cases, the new rates are much worse at 20+ percent. This significant ratcheting up of interest rates on credit cards by 5 to 10 percent impacts the disposable income of consumers and families considerably, and by a much greater margin than originally envisaged by the borrower.
Since the concatenated risks in credit markets are deeply intertwined, they display significant potential for black swans, ie, unknown unknowns, and the unruly manifestation of systemic risk without notice and with wide contagion. Fasten your seat belts, the heightened market volatility is far from over and may climb further.