The effects of household over-indebtedness on
borrowers and lenders:
impacts on borrowers, society & informal debts
CEPS & ECRI Conference
“Over-indebtedness of European households: myths and realities”
Session 2
Brussels, 26 January 2016
Hans Dubois, Eurofound
Coordinating the Network of EU Agencies 2015
Impacts: note
• Heterogeneity
– causes
– characteristics of households
– impacts on households
• But clusters of groups with similar problems, for example:
– low income, making ends meet, small expensive debts
(consumer/phone/utility)
– gradual over-commitment, multiple loans
• inadequate financial management, escalating consumption habits,
insufficient limitations borrowing
– income or expenditure shock due to risky ‘life event’
• unemployment, divorce, business failure, illness, unexpected home repairs
• crisis: ‘new to need’, job loss, own mortgaged home, young & welleducated
* European Quality of Life Survey (EQLS) will probably ask in 2016 for the 1st time about arrears (because people cannot
afford to pay) in “Telephone, mobile or internet connection bills”, along with the usual items.
Coordinating the Network of EU Agencies 2015
Consequences of over-indebtedness
for quality of life & society
• Possible, inter-related consequences (also with causes) of overindebtedness, identified in the literature:
– financial hardship, reduced living standards, deprivation of basic goods (also for
children)
– a strain on social relations
– family stress (tensions, separation/divorce - children)
– feeling of insecurity
– poor health (mental & physical)
– problems accessing healthcare (e.g. because support designed for low-income, not
adjusted for ‘new’ situation of over-indebtedness*)
– stigma
– absenteeism at work and lack of organisational commitment
– work accidents and industrial disease
– barriers to obtaining employment
– disconnection, repossession, homelessness
– exclusion from basic financial services
– difficulties borrowing in future
Source: Eurofound (2010) Managing household debts: Social service provision in the EU,
http://www.eurofound.europa.eu/pubdocs/2010/70/en/2/EF1070EN.pdf
* Eurofound (2014) Access to healthcare in times of crisis,
Coordinating the Network of EU Agencies 2015
http://www.eurofound.europa.eu/sites/default/files/ef_publication/field_ef_document/ef1442en.pdf
Consequences of over-indebtedness
for quality of life & society
• In any case negative impact on quality of life
– policy objective - ‘beyond GDP’ agenda
• May start as purely financial issue, but usually it is not, or
quickly converts in a multi-facetted issue
– important in order to know what to do, but also additional reason
‘why’…
• Negative impact for society
– financial cost
• public services
• public benefits
• lost production
– social cohesion
– trust in government
– trust in financial institutions
Source: Eurofound (2012) Household debt advisory services in the European Union,
http://www.eurofound.europa.eu/publications/htmlfiles/ef1189.htm
Coordinating the Network of EU Agencies 2015
From whom would you get support if you needed to urgently
raise [500/1,000€] to face an emergency?
82%: member of your family / relative or a friend, neighbour, or
someone else, who does not belong to your family or relatives
8%: service provider, institution or organisation
10%: nobody
Note:
- some may be gifts, but others loans
- informal debts should not be over-emphasised, but highlighted because currently
often ignored;
- we do not know size (maybe relatively small, in particular for low-income groups)
Coordinating the Network of EU Agencies 2015
Eurofound (2013) Informal debts, http://www.eurofound.europa.eu/pubdocs/2013/73/en/2/EF1373EN.pdf
Advantages of informal loans
• Cheaper and more accessible than often expensive
alternatives, in particular for poor households
• Can solve quickly emerging over-indebtedness
• Important financial help and a sign of support
• But there are risks!
Coordinating the Network of EU Agencies 2015
Eurofound (2013) Informal debts, http://www.eurofound.europa.eu/pubdocs/2013/73/en/2/EF1373EN.pdf
Focus: informal arrears
Has your household been in arrears at any time during
the past 12 months, that is, unable to pay as
scheduled…
…payments related to informal loans from friends
or relatives not living in your household
Coordinating the Network of EU Agencies 2015
Eurofound (2013) Informal debts, http://www.eurofound.europa.eu/pubdocs/2013/73/en/2/EF1373EN.pdf
Coordinating the Network of EU Agencies 2015
Eurofound (2012) EQLS overview, http://www.eurofound.europa.eu/pubdocs/2012/64/en/1/EF1264EN.pdf
Informal debts need to
be considered
1. Delayed detection of debt problems
• Payment problems come later to the surface
– Delayed need to contact formal services
– Delayed default: early-warning systems complicated
• Financial support by friends or family may not address
sources of problems
2. Domino effect of defaults
• When friends need the money back (e.g.
unemployment), defaults may trigger defaults
Coordinating the Network of EU Agencies 2015
Eurofound (2013) Informal debts, http://www.eurofound.europa.eu/pubdocs/2013/73/en/2/EF1373EN.pdf
3. Solutions less effective
• Debt restructuring leaves people with informal debts
4. Endangering social networks
• Social support important when people are struggling
financially*. At risk when can’t pay back informal debts.
Coordinating the Network of EU Agencies 2015
* Eurofound (2012) Household debt advisory services in the European Union, http://www.eurofound.europa.eu/publications/htmlfiles/ef1189.htm
Social exclusion when support is needed, in
particular for low incomes
Who would support you if you urgently need money,
according to income half & informal arrears (EU28, 2011)
25%
20%
20%
15%
12%
Informal arrears
9%
10%
9%
7%
6%
6%
7%
No informal arrears
5%
0%
Service provider
Nobody
Bottom 50% income
Service provider
Nobody
Top 50% income
Coordinating the Network of EU Agencies 2015
Eurofound (2013) Informal debts, http://www.eurofound.europa.eu/pubdocs/2013/73/en/2/EF1373EN.pdf
Low trust in local government, which often
provides needed services
Trust in local government, according to ability making ends
meet & informal arrears (EU28, 2011)
6
5.8
5.4
5.4
5.2
5.0
5
4.6
4.6
Informal arrears
No informal arrears
3.9
4
3
Easily or very
easily
Fairly easy
With some
difficulty
With difficulty or
great difficult
Coordinating the Network of EU Agencies 2015
Eurofound (2013) Informal debts, http://www.eurofound.europa.eu/pubdocs/2013/73/en/2/EF1373EN.pdf
Thank you
Hans Dubois
Hans.Dubois@eurofound.europa.eu
Coordinating the Network of EU Agencies 2015