Rise in household debt lands UK on IMF financial stability report’s warning list of countries vulnerable to a credit crunch similar to the one that triggered 2008 banking crisis

Britain’s reliance on households using loans and credit cards to spur economic growth has put the gradual recovery of the past five years in jeopardy, the International Monetary Fund has warned.

A rise in household debt to one of the highest in the developed world puts the UK on a warning list of countries vulnerable to a credit crunch similar to the one that triggered the 2008 banking crash.

The disturbing message from the IMF comes amid concerns that the world economy has become more vulnerable to financial shocks in the past year.

In its twice-yearly financial stability report, it said high debt levels in Europe and the increasing vulnerability of developing countries to volatile financial markets has worsened the outlook for global stability.

José Viñals, the Washington-based organisation’s financial counsellor, said the advent of a multispeed recovery, with some countries stalled or going backwards while others accelerate, had increased tensions in global financial markets.

“In part, this situation results from the legacy of weakened and incomplete repair of balance sheets. Risks are also rotating away from banks to shadow banks and from advanced economies to emerging markets,” he said.

The report’s red warning lights are in stark contrast to analysis earlier this week that painted a rosier picture of sustainable economic growth across the global economy.

In its economic outlook the IMF’s chief economist, Olivier Blanchard, said that while some financial risks had increased marginally, the recovery was more firmly entrenched than last year.

The warning directed at the UK followed publication of figures showing household debt levels in Britain remained high while other countries had seen bigger reductions since 2008. The IMF said Britain had reduced household debt relative to national income from 96% to 87%, leaving it behind Portugal on 83% and France and Germany on 56% and 54% respectively.

“The assumptions in this report suggest that private sector debt levels in a number of major advanced economies will remain high,” the IMF said.

“This continuing high debt calls for an additional response to address the crisis legacies and unshackle economic potential. Gross corporate debt in France, Italy, Portugal and Spain is expected to remain above or near 70% of GDP by 2020, and gross household debt in Portugal and the United Kingdom is projected to remain high compared with that of other major advanced economies,” the report added.



The Office for Budget Responsibility has forecast a return of household debt to pre-crisis levels over the life of the next parliament.

Viñals said persistent bad debts in the eurozone posed another problem that had so far remained entrenched. He said non-performing loans now stand at more than €900bn, and policymakers should “encourage banks to deal with this stock of bad loans and implement more efficient legal and institutional frameworks to speed up this process”. He added: “Banks burdened with bad loans lend less.”

Insurance companies were also in the firing line, said Viñals, who warned that European mid-sized life insurers could face rising risks of distress, with almost a quarter of insurers unable to meet their solvency capital requirements if low interest rates were to persist.

“With a portfolio of €4.4tn euros in European Union’s assets, and high and rising interconnectedness with the wider financial system, these insurers create a source of potential spillovers. This is an important illustration of the rotation of risks from banks to nonbanks,” he said.

But Viñals reserved his deepest concerns for previously fast developing nations that had become vulnerable to volatile financial markets. He listed the potentially harmful side effects from sharp movements in currencies, commodities and interest rates that could push already weakened countries to the brink of collapse.

“Strains in the debt repayment capacity of the energy sector may become more evident in Argentina, Brazil, Nigeria and South Africa, as well as in countries reliant on oil revenues, such as Nigeria and Venezuela. The sharp dollar appreciation entails additional risks for corporates and countries with large foreign currency debts,” he said.