1 0EE - Observatoire de l'épargne européenne Measuring over-indebtedness in Europe Brussels, 20 novembre 2009 Didier Davydoff, Director of the OEE
Dec 20, 2015
10EE - Observatoire de l'épargne européenne
Measuring over-indebtedness in Europe
Brussels, 20 novembre 2009
Didier Davydoff, Director of the OEE
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Introduction
Context
• Expansion of access to credit in most EU countries
• Renewal of the financial services supply
• over-indebtedness focusing the public debate in the background of the financial crisis
• And yet, no standard definition of over-indebtedness nor a complete set of standardised statistics
A common definition would allow policy making
Comparing national data and evaluate public policies
Empirical studies helping to implement better policies tackling over-indebtedness
A sharp decrease of the recourse to credit
Definition: new credits minus repayments = variation of outstanding debt Before the financial crisis: a general trend upward, with exceptions Post-crisis: the indicator tends to zero in all countries Strong correlation with dwelling prices Overall debt: only one of the factors explaining the level of overindebetdness
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-4%
-2%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
22%
1995
T1
1995
T3
1996
T1
1996
T3
1997
T1
1997
T3
1998
T1
1998
T3
1999
T1
1999
T3
2000
T1
2000
T3
2001
T1
2001
T3
2002
T1
2002
T3
2003
T1
2003
T3
2004
T1
2004
T3
2005
T1
2005
T3
2006
T1
2006
T3
2007
T1
2007
T3
2008
T1
2008
T3
2009
T1
Credit to income ratio of European households
GermanySpainUnited KingdomFranceItalyEuro aera
Definition of over-indebtedness
Key elements for an over-indebtedness definition :
The unit of measurement is the household (defined by the pooling of income)
Indicators must cover all financial commitments : housing credit, consumer credit, bills (utilities, telecoms, rent, etc.), fiscal debt…
over-indebtedness is a persistent situation To remedy the situation by recourse to (financial and non-
financial) assets is not possible. Standard of living: The household is unable to meet contracted
commitments without reducing its minimum standard of living expenses.
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An over-indebted household is a household whose actual and predictable ressources are insufficient to face all its financial commitments without lowering his living standards under the minimum, as considered in its country.
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Available statistics
I. Arrears
II. The number of debt settlements
III. Subjective indicators
IV. Economic indicators
Arrears : 9,5% of European households
- Statistic available in most of European countries- Refers to credit, but also to collective services, taxes, rent…- Depending on the country, different definitions : number of arrears, length…- Interest of the EU-SILC survey : harmonized questionnaire- the indicator is the highest in Central Europe, with some exceptions.
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Arrears on housing credit and rent : 3,6% of European households
- In 2005, arrears were not more frequent in countries with high levels of indebtedness ( Denmark, the Netherlands, United-Kingdom, Spain…)
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Source : EU-SILC survey, data for 2005
Arrears on consumer credit : 3% of European households
- No systematic correlation with the use of consumer credit : United-Kingdom under the European average.
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Source : EU-SILC survey, data for 2005
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Available indicators
II. The number of debt settlements
Debt settlements
Definition: Any resort to administrative, judicial or associative settlement or assistance
Indicators
- Court-arranged solutions to debt (e.g. personal insolvencies, bankruptcies etc)
- People assisted with repayment plans by debt advice agencies or administrative bodies
- Debt write-offs by creditors (number/values)
Examples
- Over-indebtedness barometer (France) In-flows: submited files, eligible files Out-flows: number of amicable procedure opened, procedures closed, number and average values of debt write-offs Number of files in progress
-Personal bankruptcy proceedings
Drawback They are not harmonized between countries, so hard to compare Measure more a policy or an action than the phenomenon itself Source of conflictual interpretations
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Subjective indicators
Definition: includes surveys on consumers/households and their assessments of whether they feel over-committed, among other factors such as how many arrears they had.
Category
- Questions asking people to give facts about their financial situation (e.g. estimate how much credit they owe)- Number of people reporting they are in financial difficulty- Self-reported levels of arrears
Examples
-EU-SILC Survey: number of househould considering that debt service is a burden
- Eurobarometer : survey collecting information relevant to the financial circumstances of households
- France : the Households Indebtedness Observatory (Observatoire de l'endettement des ménages) of the French Banking Federation . Survey with questions like “repayment of credits is “really too heavy”, “bearable” etc.
Drawback Indebtness tolerence varies from a country to another Indebtness tolerence varies over time
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Subjective indicators of over-indebtedness : 8% of European households consider that the consumer debt service is heavy
- A measure of tolerance to credit?
- United-Kingdom : consumer credit is twice higher than inthe euroe area and 9% « only » of households are complaining
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Subjective indicators
45
34
15
3
2
1
I am / we are keeping up without any difficulties
I am / we are keeping up but struggle to do so from time to time
I am / we are keeping up but it is a constant struggle
I am / we are falling behind with some bills / credit commitments
I am / we are having real financial problems and have fallen behind with many bills and credit commitments
DK/NA
Q3. Which of the following best describes how your household is keeping up with all its bills and credit commitments at present?
Base: all respondents, % EU27
Respondents’ ability to keep up with household bills and credit commitments
Subjective indicators of over-indebtedness : 20% of EU citizens stated that their household had financial difficulties (Eurobarometer July 2009)
The most likely to declare financial difficulties: Greek, Latvian, Portuguese and Bulgarian respondents
The most likely to declare financial difficulties: The least educated, manual workers
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Subjective indicators
18% of EU citizens stated that their household had had, at some time in the 12 months prior the survey, no money to pay ordinary bills, buy food or other consumer items.
The most affected: Romanians, and Latvians. (Eurobarometer, July 2009) The most affected: 25-39 years old, the least educated and manual workers
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Q9. Has your household at any time during the past 12 months run out of money to pay ordinary bills or buying food or other daily consumer items?
Base: all respondents, % by country
Has respondent’s household had no money to pay ordinary bills or to buy food in past 12 months?
45 40 34 33 32 30 26 24 21 20 19 18 17 17 17 16 16 16 15 15 13 12 11 10 9 9 8 5
54 60 65 66 66 68 74 74 79 79 81 81 82 83 83 83 83 84 85 84 87 88 89 89 90 90 91 95
0
20
40
60
80
100
RO
LV
HU
BG
LT
EE
EL
PL
SK
IT
CY
EU
27
MT
UK
PT
BE
FI
FR
ES
CZ
SI
IE
AT
DE
LU
SE
NL
DK
Yes No DK/NA
Economic indicators
Definition: measures of indebtness
Category
- Debt to income ratio, debt-service ratio- Number of running credits
Examples- In the United-Kingdom: number of households with debt-service to income ratio higher than 50 %
- In Belgium and Netherlands: number of households with debt-service income ratio higher than a fixed percentage and an income under a fixed threshold
Drawback They don’t exist in all countries Different definition depending on the country Their frequency is insufficient (France: wealth survey s every 4 years)
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Composite indicators
Definition: combining simple indicators
Category
- Combination of indicators
- Number of households matching criteria of various indicators
Examples - Indicator used in Germany (Schufa): linear combinations balanced with arrears- Indicator used in United-Kingdom : percentage of households matching a number of criteria (debt-service to income ratio higher than 50 %, consumer debt-service to income ratio higher than 25 %, more than 4 credits runing, subjective indicator, more than 2 mounths paiment arrears): 2% of households match 3 criteria, 1% to 4 criteria or more
Drawback Exist in few countries
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EU-SILC (European Statistics on Income and Living conditions)
• Survey on income, social exclusion and living conditions.
• A panel survey which interviews the same households every year.
• Implemented in all European countries since 2006.
• A wide-range of questions, including financial exclusion :
Households in arrears over the past 12 months
Households’ assessments of their ability to make ends meet
Capacity to face an unexpected financial shock
Assessment by households of their financial burden
Use various criteria to count overindebted households
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Over-indebtnes situation
Financial commitments leading households under poverty threshold
Over-indebtedness risk
Existence of payment arrears on at least one commitment
Monthly financial commitments considered as a heavy burden
Payment of recurring bills considered as « very difficult » or « difficult »
Illiquidity: impossibility to face an unexpected expense
Post-crisis trendsUnited-Kingdom
NUMBER OF REPOSSESSIONS ON MORTGAGE LENDING IN THE UNITED-KINGDOM
2006 S1
2006 S2
2007 S1
2007 T3
2007 T4
2008 T1
2008 T2
2008 T3
2008 T4
2009 T1
2009 T2
10 800 11 900 14 000 11 300 6 900 8 500 10 000 11 100 10 400 12 700 11 400
Source: Council of Mortgage Lenders
Arrears superior to 2.5% of the amount of the loan for 205 600 loans (1,85% of all loans) at end of June 2009 (+45% as compared to June 2008)
Slower increase of the number of repossessions Income Support for Mortgage Interest: available 3 months after the first difficulties
(instead of 9) Towards a requirement for lenders to verify the statements of income of their customers
before granting credit, in order to eliminate “liar loans”
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Post-crisis trends Spain
Value of bad loans doubled over June 2008 and was multiplied by 4.8 over June 2007
No more than 10 000 households benefitting from the theoretical moratorium on mortgage repayments
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0,0%
0,5%
1,0%
1,5%
2,0%
2,5%
3,0%
3,5%
4,0%
660
680
700
720
740
760
780
800
820
840
Bn €
Weight of bad loans in outstanding loans to households
Total outstanding loans to households Ratio of bad loans (%)
Post-crisis trends France
The number of new overindebtedness files increased by 19% over June 2008.
Number of personal bankruptcies proceedings: + 34%
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