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Slaying Europe's household debt zombies with interest rates

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Millions of British households will be grateful that Mark Carney was quick to slap down interest rate hawks only weeks into his new job at the Bank of England. A rapid rise in the cost of borrowing during these economic doldrums could push more than a million households towards insolvency, due to the continuing high levels of personal debt. The extraordinarily low interest rates are not just preserving businesses that might otherwise go to the wall but, more importantly, cheap debt is keeping financially afloat a large section of the population: meet the zombie families.

By the end of last year, according to the Resolution Foundation, a U.K. think tank, more than 3.6 million British households were spending a quarter of their disposable income in meeting interest payments on debt. A debt to income ratio of 140 per cent is extremely high for a country with a sluggish economy and an official lending rate of 0.5 per cent, exposing large numbers of people to the risk of financial stress in the event of sudden economic shocks. An analysis by the think tank of what would happen if the British economy were squeezed by a combination of weak and unequal income growth with a 2 percentage point surge in interest rates is worrying. Since the crash, the number of households in debt peril, defined as spending half of their income on interest payments, has fallen to 2 per cent. However, if base rates rose to 3.9 per cent by 2017, the Resolution Foundation reckons in its worst case scenario the proportion in peril could more than double, to over a million households.

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It is sobering to remember that an interest rate of less than 4 per cent is hardly outrageous and well below long-term averages of 5 per cent. Yet it would be crippling, not just to improvident households but to an economy struggling to expand. With so much household income supporting interest and debt repayment, there is little incentive for businesses to invest in meeting new demand for goods and services.

Elsewhere in Europe, high household debt-to-income ratios of 1 to 1 or greater are compounded by continuing economic contraction, rising unemployment and a demographic squeeze. Spanish households are burdened with debt equal to 125 per cent of their disposable income, according to Eurostat, half of young adults (under 25) are out of work and it is therefore not surprising that the birth rate is down to 1.4 per female. It is difficult to see what incentive might encourage a business to invest in Spain, not least when the euro overvalues such an investment.

It seems apt that Europe's current TV cultural sensation is a French zombie drama. There are no hideous ghouls clawing at flesh in Les revenants (The returned), just children, lovers and relatives who return from accidental or violent deaths, seemingly unharmed after seven years, to trouble, mystify and anguish the living. No one knows why these fey creatures have come back, except perhaps to torment those who live in the past and cannot, for guilt or whatever reason, move on. It's almost a metaphor for Europe's economic morass, a limbo for the alive and dead.

Carl Mortished is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights .

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About the Author

Carl Mortished is a Canadian financial journalist and freelance consultant based in the U.K. With a career spanning investment banking, journalism and consulting for global companies, he was for many years a financial writer and columnist for The Times of London. More

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