WEDNESDAY, APRIL 25: Spiralling household debt could push back the recovery from recession, an economist has warned.
Craig Simmons said that household debt in Bermuda at $5 billion-plus was four times higher than the Government’s debt of just over $1 billion.
And in a column in today’s Bermuda Sun, he added that — unless action is taken — Bermuda risked a crash in the housing market and increased mortgage defaults.
Honey Adams, of the Department of Consumer Affairs, concurred that household debt has become more prevalent: “Based on last year,” she told us, “we’re getting more calls about personal debt and the challenge of debt collection.”
Mr Simmons says research by the International Monetary Fund has shown that -recessions hit harder when they are preceded by large increases in personal debt — which has been climbing in Bermuda for more than a decade.
Mr Simmons, a lecturer at Bermuda College, said: “What started out as a public affair is now having economy-wide effects.
“It’s a public issue now, begging for a policy response from the Government and financial services sector.”
He said that Government intervention like buying up “distressed mortgages” and selling them on when times improve and increased social assistance spending would push up its debt.
But he added: “Failure on the part of main stakeholders to act quickly could prolong the recession well into 2014 or worse and plunge the housing market into a vicious cycle of defaults, foreclosures and falling prices.”
A spokesman for the Bank of Butterfield said: “As one would expect in the current economic climate, some customers have experienced losses of household income and are, therefore, finding it increasingly challenging to service their loans and mortgages.
“In those cases, the Bank works closely with the customers to try to negotiate revised, mutually agreeable repayment terms.
“Butterfield is a prudent lender and carefully considers each customer’s existing obligations and debt servicing capabilities before issuing credit cards, lines of credit, overdrafts, loans or mortgages.
“As such, our loan portfolio is holding up well under recessionary pressures, and although we are continually and proactively monitoring the situation, we do not anticipate a major increase in delinquencies.”
Honey Adams of the Department of Consumer Affairs said: “Once people are in debt collection there is very little we can do to get them out of it.”
She added: “I know that people are spending a lot less because I have talked to retailers and the Chamber of Commerce — I’m sure they and the banks will see the impact more than we do.”
Stuart Lawrence, of debt collection agency Bermuda Credit Association, said the firm had seen an upswing in bad debts.
But he added that many merchants were holding on to unpaid bills in the hope that the debtor would be able to stump up when the economy improves.
Mr Lawrence said: “There is much more that we could be doing if merchants were obliged to release some of their information and debt. We can report indebtedness to the merchant community to protect them from people unable to pay their debts and protect people from incurring even more debt.”
He added: “We have heard about banks renting properties back to people who are unable to afford their mortgages, but mortgage defaultors are dealt with through the courts usually so we don’t see that type of debt.”