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September 2011
How we get out of the debt crisis?
By Jean-Paul Betbèze, Head of Economic Research at Crédit Agricole S.A.
The debt crisis set in four years ago in August 2007. And it feels like we are nowhere near getting out of it. Therein lies the greatest danger, i.e. that the feeling becomes entrenched that we are drowning in debt, leading to recession, unemployment and ever stronger economic and social tension both nationally and internationally. This slippery slope is all too familiar. Everything is being done to avoid it, and this means ringing in the changes. And these changes are essential.
With debt, the story always starts benignly enough. It is always useful, if the right amount is used to help an entrepreneur who wants to invest and give a boost to his or her business, a household that wants to build a new home or buy a car, or a government that wants to carry out major infrastructure projects or offset the effects of a cyclical slowdown for a while. However, they soon get a taste for debt when it becomes readily available on tap, when it allows the entrepreneur to expand more rapidly— at the risk of moving too rapidly—or, worse still, allows certain economic agents to avoid making adjustments or to plough ahead regardless when their market changes. Debt always allows you to do more; put another way, it enables you to take on more risk–at the risk of taking on too much.
That’s the point at which a debt crisis breaks out– with households that have overloaded themselves with consumer or mortgage debt or businesses that have overinvested. The economy slows down and losses appear everywhere–with households, businesses and banks. In turn, a government sees its debt burden increase, since it has the same costs, but lower tax revenues, plus the spending it needs to support the recovery. This approach works… most of the time. With short-term interest rates declining and a weakening currency, rising public debt helps to offset the impact of a private debt crisis.
Evaluating market speculation
However, what is happening now is more serious, because the private debt crisis is on a large scale. It originated in the United States, where debt was used for years to inflate growth there artificially. It is weakening banks and governments, and it is spreading. It has reached a weakened Europe and is overstretching the relationships between countries. Overindebted Greece is in the spotlight, together with Ireland and Portugal. Capital market investors are fleeing from these countries, and the European Central Bank (ECB) is having to refinance their banks and purchase their bonds. Billions are being spent, and there is no clear idea of when and where it will all end. Spain and its real estate bubble are a worry, and Italy even more so, given its hefty debt burden and poor governance. Here, too, the central bank is intervening on a massive scale and seeking to calm the markets. But this cannot go even indefinitely because the amounts involved now exceed €1,250 billion, with €500 billion in government guaranteed borrowings, €250 billion from the IMF and at least €500 billion from the ECB. As always, the aim is to enable the countries to secure refinancing for longer periods and at a lower cost than from the capital markets under the aegis of the European governments and at the same time to deter the capital markets from speculating against the governments and countries.
It requires money, conviction and some skill. Skill is needed because to resolve the debt crisis, which has now become a public debt crisis everywhere, budget cutbacks and new taxes are needed, without undermining private-sector expansion. This private-sector expansion is what alone drives growth and employment, and in other words the repayment of public debt. Getting the dose right is crucial.
The right dose of medicine needs to be administered in each country—it is obvious that the adjustments made by Greece have gone too far, with the country sinking into a recession that has obliged it to postpone its privatisation and debt repayment programmes. The right dose for Italy is now in question given that the country’s population never accepts austerity measures easily and there is no political consensus. Countries also need to cooperate to get the dose right - the United States continues to pursue an isolated policy of low interest rates and a weak dollar to drive up the Chinese currency. However, the Chinese authorities do not want this appreciation in the renminbi, which gives them more imported inflation. Until they see the light. Let’s hope that we don’t have to wait too long. This debt crisis has struck the public debt and now the equity markets because everyone is aware that growth is in jeopardy.
Supporting companies
The policy options are being debated in France, but decisions cannot be made in isolation from other European countries, for the sake of both effectiveness and credibility. Even so, the goal is to reduce public expenditure by eliminating the country’s notorious “niche interests” and probably also raising taxes for the highest earners. But we should be under no illusion: these are decisions that are more political than economic. Niche interests are easy to address from a political standpoint, but they will still have an impact on growth. The money does not simply disappear into a hole. If overtime is no supported as much, there will be less of it. If low salaries are supported to a lesser extent, unemployment will increase. And if investment by wealthy investors in French overseas territories and departments is not supported to the same extent, there will be less activity in these regions. Above all, the key emphasis should be on supporting businesses. They need to be helped to operate more efficiently by providing a simpler and more stable legal and tax environment. At the same time, we must ask large groups to work closely with SMEs and subcontractors and regional authorities to get organised, streamline red tape and increase coordination.
The major benefit of a crisis is that it can make things happen rapidly that people would never have believed possible. This is true provided of course that the necessary steps are taken and that the dead-end mantras of “plunder the rich” and “quit the euro” are dropped. This is true provided that policies are explained and people are convinced of their benefits: a lower-spending government is at least as efficient. Above all, businesses hold the key to everything.
Written before 25 August 2011
Find out more by reaching Jean-Paul Betbèze video (in French only)
Find out more on by reading the Crédit Agricole S.A. research department's perspectives
June 2011
The new consumer credit landscape - Philippe Dumont, CEO of Crédit Agricole Consumer Finance
With the final sections of the Lagarde Law in France having just come into force, Philippe Dumont, CEO of Crédit Agricole Consumer Finance , explains the changes that this law will bring to consumer credit and reviews the economic attractions of this indispensable method of household borrowing.
In what way will the new consumer credit law, the Lagarde Law, impact specialised companies?
This law will transform the profession, just as the Scrivener Law (1978) and the Neiertz Law (1989) did before it. Its provisions encompass the entire credit distribution chain, covering advertising (obligatory wording, font size, etc.), products, pricing (usury rate), distribution (particularly of loans at the point of sale) and excessive debt. It will also have a radical effect in the extent of the transformations it entails and the substantial changes it requires all financial institutions to make. Revolving credit is particularly concerned, being the focus of a range of measures: maximum repayment periods, regulation of the link between credit functions and loyalty on the same card, charges, review of customer solvency, etc. These measures will probably cause revolving credit to return to its two primary roles: 1) loans for small purchases; and 2) cash to enable households to manage shocks to their budgets or to cope with an unplanned expense.
Does this mean that hitherto the consumer credit market was inadequately supervised?
Not really! No matter how transformative this law is, it applies to an activity that is already strictly regulated in France. Since the Neiertz Law (1989), there have been around twelve laws affecting consumer credit either directly or indirectly, i.e. one every twenty months. We already endeavour to distribute consumer loans responsibly. Taking all products and all distribution channels together, one loan request in three in France is turned down; the ratio in revolving credit is one request in two, as highlighted by the Athling report. Crédit Agricole Consumer Finance has always stood out in the way it prioritises its lending policy, in an ongoing effort to protect customers. But this new law will encourage us to be even more vigilant than in the past. It will control certain excesses, notably in the distribution of revolving credit. Such excesses ultimately discredit the distribution of consumer loans, which nevertheless have real economic and social benefits.
If you could make two wishes for Crédit Agricole Consumer Finance and its sector, what would they be?
The first, naturally, would be to consolidate our position as a European leader in consumer credit. At the end of 2010, we had more than €78 billion of outstandings in 22 countries. The international region accounts for two-thirds of our business. But, beyond this quantitative leadership, we want above all to become the uncontested benchmark for the sector in terms of satisfying our customers and partners, as well as in product innovation.
The second concerns the French market and recognition of the economic usefulness of our sector, which is sometimes forgotten in public debates. Consumer credit plays a key role: the spending it makes possible represents more than 7% of GDP. It is indispensable to the health of some sectors: three out of four new cars and nearly every other second-hand car are acquired with the help of a loan; consumer credit represents 25% of specialised retail sales and 40% of mail order sales. Nevertheless, overall consumer lending in France is used less than in other comparable economies. There is therefore real potential for this activity, which Crédit Agricole Consumer Finance intends to exploit.
Outlook for the quarter - Florian Roger, Head of Macroeconomics, Amundi
Towards a normalisation of economic policies
At the start of 2011, the global economy suffered a series of shocks (Arab spring, Japanese tsunami…). In addition, in order to counter rising raw material prices, emerging market central banks had to tighten their monetary policies. The combination of these factors triggered a dip in global growth. Nevertheless, the economic data shows that the recovery is not at risk, and global growth remains driven by a number of elements. Job creation is growing in the US, investment momentum is proving particularly robust in Germany, while industrial output is still growing by around 15% in China. The expansion cycle in the world economy should therefore continue, though at widely varying speeds in different regions.
The emerging economies are on course for annual average growth of around 6.5%, while the GDP growth rate for developed countries, weighed down by debt, is expected to be no more than around 2.5%.
The US is expected to embark on a process of budgetary consolidation in 2012, with the trend in public debt starting to cause concern among the rating agencies. In Europe, the problem of debt is even more acute. Greece, Ireland and Portugal have had to request help from the IMF and the other euro zone members in order to refinance themselves.
The euro zone needs to find cooperative, credible and lasting solutions to reassure investors and to prevent market stresses spreading to other countries, such as Spain.
The economic outlook is more for consolidation and normalisation of economic policy, rather than for an acceleration in growth.
