Debt problems loom Large

SIR Andrew Large is taking a brave stance on household debt. At a time when everyone from the lenders to Treasury officials seek to assure us that the build-up in personal leverage is not serious - just a simple adjustment to a lowinflation, low-interest rate world - the deputy governor of the Bank of England sounds a warning of potential trouble.

It would be easy to dismiss Large as a Cassandra in a world of optimists. But he has plenty of good data to back his concern.

The ratio of household debt to annual income has increased in Britain to 130%. This is a phenomenon shared with several other industrial countries - notably the Netherlands and the United States - but that does not make it any more acceptable in Britain.

In particular, unsecured debts (including those on plastic) have doubled over the last decade.

Indeed, household debt has been rising as a proportion of after-tax income since Labour came to office in 1997. Large believes that with debt growing faster than income, the 'potential vulnerabilities' are rising.

As both a former financial regulator and banker (at Barclays) the deputy governor is in a good position to see the potential for trouble from both sides of the fence.

Lenders clearly are more confident that they have the systems in place to avoid the bad debt problems of the 1990s.

But so, we were assured, did Abbey National, after it went hell for leather into the wholesale banking market.

Investors now know to their cost that the group was not equipped for this new role, having run up £1.6bn of losses in the last two years because it became foolishly over-extended.

Shocks are always around. In Abbey's case they came from the US accounting scandals which exposed big holes in its loan book.

But anyone living through the last month must recognise that they can come in the political sphere, too, with the Madrid bombings, the Gaza assassination and the coming transfer of power in Iraq. Being over-geared in periods of uncertainty is dangerous.

Large raises an important social corollary. The build-up of debt in the present generation of households may mean they are less prepared for pension provision, longterm care and increased longevity. In other words, the spending boom by the current generation may impose a severe penalty on the next.

None of this is particularly cheerful. But it is a useful anecdote to those at the Treasury who believe the era of boom and bust is over.

We heard the story of the 'new paradigm' in the late 1990s - when output growth and the bull market were set to last for ever - and then we had the biggest setback to shares since the 1970s.

Penrose taint

RUTH Kelly, the Financial Secretary to the Treasury, has come in for a fair amount of criticism over her selective presentation of the Penrose report into the near-failure of Equitable Life. She pointedly sought to blame previous management and 'light-touch' regulation by the Tory government and was sparing in her criticism of regulators.

The decision to go soft on regulators - the Department of Trade & Industry, the Government Actuary's Department and the Treasury itself - has been construed as part of a broad-based effort to deflate the case for compensation.

As we disclose today, it now appears that Tom Davis, described by the Treasury as an agency worker assigned to Scottish Judge Penrose's team, was unconvinced of the case for compensation too. Postings on the financial website Motley Fool, apparently originating with a Penrose team e-mail address, rubbished the case for compensation on the grounds that most of the Equitable victims came from upper-echelon social classes.

It is well known that many Equitable victims were from upper income groups, including lawyers and judges. Indeed, the current chairman of Equitable Vanni Treves is a victim. But it would be totally wrong to argue that because people are well off they do not deserve financial justice.

This is like saying that burglars who target the rich and famous should be let off lightly because the victims can afford the losses.

Equitable policyholders - many of whom are ordinary savers and pensioners - have suffered real hardship. They need to be assured that those working on the Penrose report and at the Treasury did not allow their personal or political views to be coloured by the prosperity or otherwise of victims.

Ruth Kelly and Lord Penrose have some explaining to do.