Debt soaked Britain

Recently, the Daily Telegraph has produced some excellent articles on the parlous state of UK personal finances. This article produces the cold hard facts. We are a nation addicted to debt; we are so deeply in debt that we cannot see sunlight.

Currently, UK households owe about £1.3 trillion. Furthermore, this figure has doubled over the last seven years. If you think this change in indebtedness isn't serious, ask yourself this question; how many people do you know that have seen their pay packets double over the last seven years? Not many, I would venture.

However, you have to laugh at the exhortation from Mervyn King, the Bank of England Governor, not to borrow. This mountain of debt would not be quite so large it the Bank of England had not reduced interest rates in 2002-4 in such an irresponsible manner. Growth might have been a little slower, but inflation would have been lower, so would personal debt, and we wouldn't have a housing bubble. Furthermore, the Bank of England would need now need to aggressively interest rates in order to get a grip on things.

Sunday Telegraph

The day of reckoning has arrived for a debt-soaked nation living for too long on easy credit. And it's going to hurt. Last week in Cardiff, a mild-mannered man called Mervyn stood up, pushed back his glasses and stated the obvious: "It is unwise to borrow so much that the repayments are affordable only if interest rates remain at their initial levels."

Sensible, if unremarkable advice, one might think, from a governor of the Bank of England known for his conservatism. But Mr King's warning to the Welsh CBI marks the end of a decadent decade in British history when many of us have done exactly that: borrowing as if there were no tomorrow, living on the never-never, driven (or reassured) by the ever-rising price of the roof above our heads.

The day of reckoning has come for a debt-soaked society that has seen outstanding household loans double to £1.3 trillion in just seven years. In a deliberate new policy of blunt-speaking, the governor eschewed the normally equivocal language of central bankers to warn that if we don't change our free-spending ways, he will - by pushing up interest rates until the growing threat of inflation is eliminated.

advertisement"It wasn't what he said; it was who was saying it," says Ray Boulger, a mortgage broker. City economists expect the response to come by August, increasing interest rates from 5.5 to 5.75 per cent. But the real fear is that this will not be enough and that 6 per cent interest rates will be with us by the autumn.

This could make for a rocky Christmas, not just for homeowners but also shops and manufacturers reliant on easy credit to fuel consumer spending. Property experts fear the housing market may not be able to cope

"A quarter point rise is as much as the market can take. Anything more will precipitate a serious crash," says Robert Bryant-Pearson, of Allied Surveyors, the largest independent property valuer. "Everyone seems to forget what happened between 1990 and 1993: the repossessions, the negative equity. The problem now is that people's borrowing in relation to their income is extremely high."

So far, the level of repossessions is a far cry from the days of the early 1990s recession and property crash. Between 1990 and 1993, 247,000 homeowners lost their homes as house prices slumped and unemployment rose sharply.

But the Council of Mortgage Lenders estimates this measure of affordability, or arguably unaffordability, reached a 15-year record even before the latest mortgage rises kicked in, this spring. To make matters worse, the biggest impact of higher mortgage rates is still to come for many homeowners. Analysts at Credit Suisse estimate a million borrowers who took advantage of cheap two-year fixed rate loans at the end of 2005 are about to experience the shock of their lives.

But tightening of the interest-rate screws by the Bank of England is only the half the story. On the other side of the Atlantic, the cost of borrowing is shooting up even for George W Bush. The world's most powerful government gets to borrow from the world's deepest financial pool: the colossal market in US government debt, known as Treasury bonds.