No credit card bubble in US yet
Updated: 2008-12-02 07:10
By Ernest Chan(HK Edition)
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While the collapse of the international financial sector and the credit markets has caused a lot of market volatility in recent months, investors are looking for the next possible bubble that could push the US economy into deeper recession. It could be the credit card debts.
As US consumers are highly leveraged overall, the already slowed asset inflation has started to reduce US consumer confidence in spending. Given the tighter lending standards, lack of mortgage cash out and recession-induced pronounced weakening of the labor market, disposable income is likely to drop dramatically, and liquidities are likely to be squeezed.
These could trigger a higher credit card default rate. Since the current US credit card debt market is by no means small at about $1 trillion, a collapse of this market would create another wave of writedowns for financial institutions, which could either see more government intervention or bankruptcy.
However, we believe the situation is not as bad as most people expect.
The mortgage debt has more than doubled to approximately $10 trillion since 2000. The increase is significant in absolute term, and in relation to the disposable income. It rose approximately 100 percent during the same period, pushing up the total debt ratio to currently just under 134 percent of disposable income.
So, while we can actually speak of a bubble as far as mortgage loans are concerned, the same does not apply to outstanding credit card debt.
Although in absolute term the credit card debt has risen to $1 trillion, approximately $3,000 per capita, the percentage has merely fluctuated around 9 percent, which suggests the growth of the credit card debts and disposable income are about the same.
Although the share of credit cards with payment arrears and defaults recently reached around 5 percent of total credit card debt outstanding, we do not believe this is an above-average increase in credit card defaults.
The latest increase is in line with the usual cyclical pattern that occurs when unemployment rate rises in a slowing economy. Furthermore, since the interest rate is significantly lower than before, the credit card rates have dropped to less than 12 percent, compared with 15-17 percent last year, which actually limits the increase in the household's debt servicing burden.
We believe that US households are finding it difficult to get refinancing. They are likely to keep their credit cards as a liquidity cushion in a situation where access to consumer credit is limited.
However, the stable ratio of credit card debt to disposable income suggests that there is no credit card bubble yet.
Lower interest rates for consumer credit and the recent pronounced slowdown in credit growth suggest that US households' debt service burden may have peaked despite the expected decrease in disposable incomes.
The author is the director of Convoy Asset Management Ltd.
(HK Edition 12/02/2008 page3)