Coronavirus: a dangerous wave of personal over-indebtedness is on its way: here is how to avoid it

With the crisis caused by the pandemic, a large number of citizens will see their professional income fall, resulting in a sharp increase in the risk of over-indebtedness. This risk is much higher for families with modest incomes, with little or no savings available to get through this bad patch, or for families who are already over-indebted. Urgent measures are needed today to contain this risk and to ensure that the future of these households, after the crisis, is not jeopardised by over-indebtedness.

As a result of the crisis, many people risk having little or no income during the period of containment. In addition, people could also find themselves weakened/made precarious by situations of non-compliance with technical requirements for benefits: e.g. access to unemployment benefits is often conditional on the fulfilment of various criteria that may not be met in the current circumstances by a significant number of European citizens. The recent rise in precarious self-employed jobs (e.g. so-called Uber jobs) will increase the number of precarious households.

We are concerned about the consequences of this loss of income for citizens and for the disastrous consequences that it may have on their living conditions today; and we are also concerned about tomorrow, if households and families have only been able to get through the immediate difficulties by an increase in debt, they risk mortgaging their level of future consumption for a long time to come. The ECB working paper[1] published this month brings key learnings on this particular risk.

In the raft of measures now taking shape at European and Member State level, it is urgent not to forget the citizen. Of course, measures to preserve economic activity and its recovery after the crisis are absolutely essential. But it is just as essential to ensure that household consumption is on track and that it is not maintained only at the cost of an uncontrolled increase in debt. It should be remembered that the households most affected are also those that will only have access to the most expensive forms of credit (mostly from non-bank credit providers), and that lenders are already engaged in targeted marketing to promote high-cost credits.

We welcome the numerous measures taken by various national governments to help the self-employed in difficulty and to ensure the continued provision of water, gas and electricity, as well as the suspension of eviction procedures.

It would be a good thing if these measures were to protect European citizens uniformly, in order to prevent the ever-widening gaps between the powerful European countries and the more fragile nations.

Among those whose incomes are negatively affected by the crisis are people who are already in debt or over-indebted, for whom it would also be decisive to provide specific protections such as:

• Lengthening, free of charge, the maturities of mortgages and consumer loans. The latter are most often used by the most financially precarious households, so they should not be forgotten. These households are also those with less savings/assets to get through this period of turmoil without becoming over-indebted;
• Freezing all seizures and all costs and other penalties related to non-payment of debts, in particular in the event of recovery measures;
• Imposing an obligation on lenders to inform insured consumers of the possibility of exercising their loss of employment insurance: a survey[2] by the Belgian Financial Services and Markets Authority has highlighted the difficulties encountered by consumers in exercising their outstanding balance insurance in the area of consumer credit.

The measures to be taken:

We therefore recommend, as an exception, for people with incomes affected by the health crisis, the competent authorities urgently take the following measures:

With regard to enforcement measures :

• Suspend all new enforcement measures (foreclosures on primary residence, seizures of goods and money, assignment of wages, etc.) in view of the current difficulty or even impossibility for individuals of exercising legal remedies;
• Suspend the limitation periods and the time limits for appeal, from 1 March until the end of the crisis situation.

With regard to consumer credit and mortgages:

1. Suspend until further notice lenders putting borrowers (mortgages and consumer debt) into official default for missed payments (or more generally the terms of payment) since 1 March 2020 ;
2. Suspend until further notice the effect of penalty clauses and interest surcharges for unpaid instalments during the suspension period ;
3. Suspend until further notice for these instalments any registration in private or public credit registers for non-payment ;
4. In the case of contracts with an amortisation plan, require lenders to allow consumers to defer unpaid instalments during the suspension period until the end of the payment plan without charge or penalty, in accordance with the terms of the contract.
5. For credit agreements without an amortisation plan, require lenders to defer the payment of outstanding instalments for a period of one year starting at the end of the suspension period, without charge or penalty, in accordance with the terms of the agreement.
6. Impose an obligation on lenders to inform insured consumers of the possibility of exercising their loss-of-job insurance and facilitate its implementation.

The implementation of these measures involves both national and European levels of government. It was noted that the signals already sent out by Europe should facilitate work within the Member States.

Indeed, both the European Banking Authority (EBA)[3]  and the European Securities and Markets Authority (ESMA)[4] are showing goodwill to make this approach possible.

The European Central Bank (ECB)[5] in its €750 billion Pandemic Emergency Purchase Programme (PEPP) states that families will not be left behind. “The Governing Council of the ECB is committed to playing its role in supporting all citizens of the euro area through this extremely challenging time. To that end, the ECB will ensure that all sectors of the economy can benefit from supportive financing conditions that enable them to absorb this shock. This applies equally to families, firms, banks and governments.”

With regard to other outstanding receivables:

• Suspend until further notice all contract cancellations (e.g. hire-purchase) due to unpaid instalments since 1 March 2020 ;
• Suspend until further notice the effect of penalty clauses and interest surcharges for unpaid amounts falling due during the suspension period.

Conclusion :

For the protection of the most vulnerable households, whose incomes are negatively impacted by the health crisis, it is necessary that:

• Mortgage loans and consumer loans benefit from the same crisis-related adjustment measures.
• Low-income, indebted or even over-indebted households do not see their financial situation deteriorate during the health crisis. The measures to be taken must guarantee their income levels and prevent any increase in charges, particularly financial charges or those linked to debt recovery. These households do not have precautionary savings.
• The competent Governments take the necessary measures to accompany the efforts made by lenders (banks and non-banks), in order to avoid any threat to the stability of the credit sector;
• The use of additional credit by these vulnerable households to get through this crisis is to be avoided if we want to avoid a massive increase in over-indebtedness in Europe and allow demand to be met when the economic recovery needs it most;
• Public aid, both national and European, must make it possible not only to keep the financial and economic sectors in good health, but also the financial health of households. In this respect, the daring concept of helicopter money[6] is undoubtedly an interesting avenue that could be explored by the ECB and the European authorities in general, given the benefits that is seems to allow both in terms of financial system stability (macro) and in terms of preventing household overindebtedness (micro).
• The Spanish initiative to provide a basic income for all citizens, providing a safety net for all citizens, is also an interesting approach as it should avoid loopholes in other protection measures, and provide protection for the most vulnerable groups (including those that are often “off the radar”).

Olivier Jérusalmy