Bank warns of debt-led crash

THE Bank of England today issued its starkest warning yet that the household debt mountain - which has now mushroomed close to £1 trillion - could ultimately trigger a nasty economic slowdown.

In a speech that shortens the odds on another interest-rate rise next month, Deputy Governor Sir Andrew Large warned that the fast-rising debt levels could 'at some point trigger a sharp demand slowdown that could have an adverse impact on monetary stability'.

Large, a member of the Bank's interest rate-setting monetary policy committee, said the potential vulnerabilities from higher gearing were rising as consumers take on debt at a faster rate than their incomes are growing.

He stressed that consumer debt was on the whole beneficial, and said he was more of an optimist than a pessimist over the dangers, but added: 'As with many things in life there are potential downsides.'

Large, one of the more hawkish members of the MPC, was explaining in an address to the Corporate Treasurers' annual conference why he had often voted for rate rises in recent months.

The base rate was raised by a quarter of a percentage point in both November and February and now stands at 4%. He did allow the question of debt 'to weigh in the difficult balance all of us (on the MPC) face each month', he said. The MPC next sets rates on 8 April.

'Even if the probabilities of things going wrong in the near future may not be high, there are nonetheless credible threats and over time the risks might mount,' he said. He also pointed to potential hazards for banks.

Tim Congdon of Lombard Street Research commented that although rising debts posed a serious policy problem, it was much less of a danger than in the late 1980s when falling house prices led to personal bankruptcies, millions in negative equity and a prolonged economic slowdown.

Households borrowed 1.2 times their incomes in the late 1980s; today the ratio is 1.5. But interest rates are much lower and are thought unlikely to rise to past peaks of as much as 15%.

Human price of spiralling debt

THE human face of booming debt was highlighted this month with the suicide of a young father who hanged himself.

Stephen Lewis, 37, lived modestly on his £22,000-a-year salary but, at the time of his death, owed £70,000 on 19 credit cards and was being hounded for repayments on several of these.

Most people have not got to this state of either debt or mind but, on average, we have increased the amount we owe by more than £2,000 in the past six years. In 1998, the average total of unsecured debt - credit cards, car loans, hire purchase and overdrafts - was £2,231. Today, according to Datamonitor, the average is £4,426.

That is before remortgaging, which economists blame for a house-price-boom-fuelled spending spree. Britons spent a record £22.1bn on credit and debit cards over Christmas, up more than £1bn on the year before.