ECRI Conference
Lending to Households
after the crisis
How should the lessons from the past
be reflected in regulation
16th May 2013
Brussels
Contributing to the pre-crisis growth
• Household debt an important part of the growth story
• Liquidity constraints of households decreased
• Increase in homeownership contributed to stability of income
• The economic multiplier of credit boosted economy
• Life-cycle hypothesis
• If economy grows, the future income expectations are high
• If expectations high, higher value over the rest of the life cycle
• If interest rates low, increasing the discount rate on the future
• Therefore it is seemingly more sustainable to take on more
credit in the short term
The run-up
• As a result, relatively high leveraged households
• Not a problem if economy keeps growing, but…
• Highly leveraged households are more sensitive to…
• Future income-expectations changes
• Change in interest rates
• A financial shock or a crisis
• causes future expectations to drop quickly
• Debt service increases as a ratio of income
• Both lead to lower borrowing, lower spending and lower
aggregate demand than in less leveraged households,
deepening the crisis
1. Household-debt development
on EU and member-state level
No clear pattern on EU aggregate level
A range of different developments in EU
member states
European “Core” – overall household debt levels in real values
Stable or rising debt levels throughout the crisis
European “Periphery” – Overall household debt levels in real values
Crisis having large effect on the household-debt growth rates
1. Household-debt development on EU
and member-state level
• EU aggregate data not telling any story
• Necessary to go on member-state level
• What was driving such vast diversity?
• Financial market integration and innovation
• Limited policy encouragement of home-ownership
• All leading to higher supply everywhere, but…
• The cost of credit
• Extremely different real interest rates (APR) across the EU
• Significant correlation with debt expansion
2. The cost of credit
Real APR across the EU – a diverse picture
2. The cost of credit
• Relative stability of real interest rates in the core
• A more varied cycle in the case of periphery
• Great volatility in the new member states
• Sometimes persistently low interest rates during highinflation periods, inflating the debt
• In CEE countries pegged to the euro the most radical
development during the crisis
• Consumer credit spreads increasing
• Reflecting the rise in risk of income losses (no collateral)
Real APR in the core and periphery countries
3. Diverging or converging?
Relative Standard Deviation between EU
member states
3. Diverging and converging
• A continuing decrease in relative mean deviation among EU27
• Persistent convergence in terms of household indebtedness per capita
and to GDI since 2000
• The rate of convergence
• Tended to accelerate year after year until 2004
• Was interrupted before the crisis by the indebtedness of the European
periphery rising above the EU average
• Subsequently, by the financial crisis and fast debt reduction in some new
member states
• The rate of convergence of CEE10 to EU15 has been significantly slowed
down by the crisis.
Divergence influnced by the movement between
the core and the periphery
Not as much between the
East and the West
Real APR in the old and new member states
3. Diverging or converging?
• Very little convergence between the East and the West
• Some convergence between the core and the periphery
• Hopeful? Is this what we need?
• Somehow a god result in terms of what we would expect of the
recovery, but…
• The most leveraged countries have the most difficulties with
aggregate demand, which retrenches as households deleverage
• It can be good but depresses the economy further and
renders remainders of the debt less stable and consequences
of it more severe
4. Should EU households
reduce their debt
What influences deleveraging
• An intuitive conclusion would be that recent debtreduction would be associated high household leverage
• This is not the case
• The most significant determinants are the rates of credit
expansion before the crisis and interest rates
• Interest rates reflecting the rising risk premia linked to income
disruptions (unemployment, stagnant wages)
• This points out to a limited convergence and raises doubts on the
structural homogeneity of EU member states
• In other words: high debt in some countries is more
sustainable than in others even if controlled for income!
20%
Deleveraging because of what?
SK
SK
SE
10%
LU
MT
UK
CY
NL
AT
0%
DE
SE
FI
CZ
PL
CZ
PL
FR
FR
CY
ITBE
DK
IT
SI
BG
-10%
EE
LU
FI
AT
BE
DE
DK
SI
RO BG
RO
EE
PT
ES
EL
PT
-20%
ES
EL
IE
IE
HU
0%
UK
NL
100%
200%
HU
300%
0%
100%
200%
Debt growth (pre-crisis period, 2003-2007)
Leverage to GDI at peak (December 2007)
Linear prediction plot (R²= .2675***)
Linear prediction plot (R²= .0024)
Source: ECRI, ECB, Eurostat; Note: *** p<0.01
Deleverage now or deleverage later
• Should households deleverage now?
• There is debt overhang in some member states, but its
reduction during the recession can be more costly than
leaving it alone for the moment
• The effects of household debt on demand and historic data
suggest that deleveraging should occur after the recovery
• Most of the effects on household debt cannot be dealt
with on the regulatory level
• The real problem not debt but weak or no recovery
• The monetary transmission mechanisms