Rising levels of household borrowing at a time of macroeconomic weakness will cause Britons to struggle with loan repayments, according to influential ratings agency Moody’s, as consumer debt rose back over £200bn.
Moody’s has changed its collateral outlook on two of the UK’s structured finance sectors to reflect the declining ability of Britons to make meet interest payments on loans.
The collateral underpinning asset-backed securities (ABS) and retail mortgage-backed securities (RMBS) is now rated as having a negative outlook, reflecting a perceived likelihood of a deterioration in British consumers’ financial position.
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Structured finance products take individual loans and bundle them together to be sold as securities, meaning their prices are sensitive to the performance of the underlying loans.
Greg Davies, a research analyst at Moody's, said: “Household debt is high and still growing, leaving consumers vulnerable to an economic downturn, while higher inflation, weaker wage growth and levels of indebtedness leave those in lower-income brackets the most exposed.”
The ratings agency’s analysis reflects recent Bank of England warnings that the growing stock of debt could be creating “pockets of risk” that endanger financial stability.
The Bank warned car loans in particular have rapidly risen to uncomfortably high levels, with some borrowers potentially overextended amid intense competition. Moody’s has added a similar warning that late repayments on car loans in particular could rise, affecting auto ABS.
The amount of consumer credit grew by £1.5bn during June to break through the £200bn mark for the first time since the global financial crisis, according to the Bank of England.
There is now £200.9bn of consumer credit outstanding, the highest amount since December 2008.
Meanwhile overall consumer lending, excluding mortgages, grew by 10 per cent over the past year, the 14th consecutive month of double-digit annual growth in consumer credit.
While that represented a welcome moderation in the pace of credit growth, it still vastly outstrips the growth in wages over a comparable period. Britons’ pay packets grew by 1.8 per cent in the year to May, according to Office for National Statistics data.
At the same time the leeway for Britons to draw on savings to fund consumption and debt interest payments has fallen, with the savings ratio reaching its lowest level on record last month.