Page last updated at 00:04 GMT, Thursday, 6 November 2008

Credit crash Britain - Money for nothing

By Dan Trelford
BBC Money Programme

Spending money has become tougher as credit has been tightened

"When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you've got to get up and dance."

The statement was made in July last year by Chuck Prince, the chief executive of America's biggest bank, Citigroup.

Shortly afterwards the music finally stopped.

The bankers staggered home and woke up, disoriented after their borrowing bender.

What exactly had they done? It was time to clean up their act.

The result of this new found sobriety, as Mr Prince predicted, was that liquidity got "complicated".

In other words, the credit crunch began.

Banks, terrified of their exposure to losses from US sub-prime mortgages, stopped lending to each other, and to ordinary people and companies

A decade long lending boom based on cheap credit came to an abrupt end.

Tight credit

In the UK, the average deposit required for a mortgage product, according to Moneyfacts, has jumped from 10% to 20%.

House for sale
Getting a mortgage used to be easy, but that is no longer so

Millions of credit card and loan applications have been refused, and interest payments on mortgages, loans and credit cards have soared by more than 90bn.

"If you're at all risky you're going to find it very hard to get credit," says Chris Giles, economics editor of the Financial Times.

"Because the banks are now going to be saying 'the last thing I want on my books is another risky person who might default'.

"If there's anything dodgy in your credit history, if you're young, if you need to borrow a lot of money, it's actually going to be your income that will determine your spending in the future. You will not find it so easy to go out and have credit."

Not available

For many of us, life without cheap and easy credit means a radical shift in our attitude to borrowing.

You have to have the money in your hand before you actually get something now
Bruce Eyre

"What we discovered was the bottom 40% of UK households had negative cash flows, ie they didn't make their ends meet," says Sandy Chen, a banking analyst at Panmure Gordon.

"A year ago that wasn't a problem because you could get that extra credit card or you get that 130% loan-to-value mortgage easily. You can't do either of those things nowadays."

Refat Naz, a team leader at National Debt Line, has noticed the number of people struggling to get by now that cheap credit has dried up.

"We are getting calls from clients who have previously relied on credit cards, and now are having to look at the options of either dealing with their debts with other options, or just making reduced payments as they don't have those financial products available to them anymore," he says.

Declining investment

Speaking earlier this year, Mervyn King, Governor of the Bank of England, summed up the current economic climate.

Mervyn King
Bank Governor King oversaw a cut in rates to 3.5% in 2003

"For the time being at least, the nice decade is behind us," he said.

When Mr King and other economists refer to the nice decade, they don't mean 10 years of rocketing house prices and the sense of prosperity this engendered: they mean "non inflationary constant expansion".

Mr King and his predecessor Lord George presided over a long period of economic growth and low price inflation.

However, even during the "nice" years, the threat of economic turbulence loomed, as Lord George explained to the Treasury Select Committee in March 2007.

'When we were in an environment of global economic weakness at the beginning of the decade it meant that external demand was declining," he said.

"Related to that, business investment was declining.

"Confronted with what we saw, we knew that we had to stimulate consumer spending. We knew that we had pushed it up to levels that could not possibly be sustained in the medium and longer term, but for the time being if we had not done that the UK economy would have gone into recession.

"That pushed up house prices and increased household debt. That problem has been a legacy to my successors: they have to sort it out."

Debt mountain

In 2003, as Mr King took over from Lord George at the bank of England, the Monetary Policy Committee cut interest rates to 3.5%, the lowest figure for 50 years.

"For customers it did something that was quite remarkable," says Mr Giles. "It made borrowing money, particularly for mortgages, extremely cheap.

"And so you saw the volume of lending rise very, very quickly, and banks - because they were competitive in a very competitive industry - were more than happy to meet this demand."

Today, the "legacy" of soaring house prices and record levels of borrowing amounts to a mind boggling 1.4 trillion.

In other words, the total amount of consumer debt - what we owe on mortgages, loans and credit cards - outstrips the entire gross domestic product, or GDP, of the country.

No life

Bruce Eyre from Wiltshire is one such consumer who is now coming to terms with his own personal debt crisis.

With more than 250,000 owed to his creditors, he has decided to declare himself bankrupt, and his home of 17 years is being repossessed by the bank.

"You have to have the money in your hand before you actually get something now," he says.

"We've moved onto the stage where if we don't have the money we can't have it."

Anne Ingoldby and Nick Haywood from Worthing have some 50,000 of credit card and loan debts.

Rather than file for bankruptcy, they are trying to pay back what they owe, and they have signed up to a debt management plan - along with 600,000 others this year.

After paying their essential bills and their creditors, they are left with just 100 a month.

"We don't have a life," says Ms Ingoldby.

'We can't spend any money. If anything goes wrong or breaks we have problems. We have no money to pay for things."

At their current levels of repayment, it could take Ms Ingoldby and Mr Haywood seven or eight years to repay their debts.

For the rest of us, its anybody's guess how long the hangover from the 'nice' decade will last.

Credit Crash Britain - Money for nothing, BBC 2, Thursday 6 November at 1930.

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