Credit card quicksand
In 2006, the number of insolvencies hit an all-time high of 100,000 in the UK, painting a picture of a debt-ridden nation. Whilst Britain has a much stronger credit-card culture than here, evidence is emerging that Spain is on the verge of its own debt crisis.
In less than a decade, the number of Spaniards in debt has doubled, a rate even greater than the UK’s, according to an annual study by Caixa Catalunya. The EU considers the situation grave enough to have declared Spain’s current path as “unsustainable”, and ranks Spain in the top five countries of personal debt. Although EU economists acknowledge that the problem is generally restricted to small sectors of society, they warn that the knock-on effects could be catastrophic for the rest of the Spanish economy.
“Opinions amongst economists, including those at the Central Bank, are divided, but Spanish households are increasingly fragile economically,” Catalan economist Rafael Boix told Metropolitan. “But until there is some sort of economic collapse, people will carry on regardless.”
One thing most observers agree on is that Spaniards have not chosen to save their money in banks. “The financial situation of households has become more and more risky because any savings people have is tied up in property,” said Josep Oliver-Alonso, an economist in the Barcelona Autonomous University’s department of Applied Economics
“People are investing more in property since it offers such a good return compared to interest rates on savings which have declined. In Spain—and in Catalunya—the trend is exactly the same, which is that the amount of household debt has doubled between 1994 and 2005. The signs are that we are heading towards the same levels of debt that you see in countries such as Britain and the USA.”
Whilst application for a credit card involves at least a trip to the bank in Spain, anyone who has lived in the UK can testify to the amount of credit-card offers that come through the post on a regular basis. Easier access to credit has seen more and more people using credit cards or loans to supplement a lifestyle they really cannot afford in the UK. Debt on multiple credit cards can quickly overwhelm people's resources. There’s also evidence of serial debt consolidation with homeowners re-mortgaging their property to the hilt.
“This is an important difference between the debt problem in the UK and Spain,” said Rafael Boix. “Mediterranean countries have a strong tradition of home-ownership, and whilst the problem in the UK is more credit-card consumer spending, the problem here is due to property investment.”
The sectors of society affected by debt also varies somewhat in the two countries. In a study called 'The Irresistible Rise of Family Debt', the Fundación de las Cajas de Ahorros (FUNCAS) found that those in debt in Spain tend to be from the middle classes whereas in England it is the lower income groups that constitute the majority. It found that when investment in property is discounted, only 30 percent of Spaniards have money in shares or savings accounts. The families with most problems were actually those “with considerable savings but not enough to meet their commitments and were subsequently resorting to credit cards to pay the shortfall.”
The report’s author, Vitorio Valle wrote: “Those in debt are not immigrants or ‘mileuristas’ [those that earn €1,000 per month]. They are middle class families that are generally living beyond their means.”
Despite these conclusions, Valle agreed with those who say there is no need for panic quite yet. “The debt here is restricted to a small number of families, but if credit card interest rates continue to rise above salary increases these families will find themselves with some big problems.”