Health crisis: Credit is not the solution to the financial problems of precarious European households

Financial precarity that will be with us for a while

The problem in a nutshell: the public health measures that European governments have taken during the coronavirus pandemic have resulted in a significant reduction in the income of a large number of citizens, the consequences of which will be felt for years to come. With the exception of a few sectors that have had little or even a positive impact (online sales platform, on-demand television programmes, etc.), many activities have suffered drastic reductions, are at risk of mass bankruptcies, with the timing of any recovery hard to predict. The unemployment rate, which in February 2020 was at its lowest level in Europe since the 2008 crisis (6.5%[1]), is showing worrying signs of growing in many countries, in addition to short-time unemployment, which is already widespread[2]. And we won’t know the real or final impact on unemployment for a while.  Potential recovery will also be delayed if there is a second wave of the virus this autumn, as some virologists and epidemiologists predict.

Approximately a quarter of Europeans are particularly exposed to the risk of over-indebtedness.

The European households most at risk are those that do not have precautionary savings, do not own their home, and/or use consumer credit to make ends meet. In 2018, these households represented 22% of the population of the 28 Member States: they are the ones that European statistics discreetly refer to as “people at risk of poverty and social exclusion”[3]. Their numbers are likely to increase significantly in the coming months.

How could they cope with this fall in income?

A reduction in expenditure equivalent to the reduction in income: difficult, if not impossible!

This possibility is quite theoretical, because the 22% of European households that concern us do not have such budgetary margins. Rent, when supplemented by incompressible charges[4], occupies an important place in the budget and does not offer any flexibility. Spending on travelling to work, hygiene, health or food is also clearly incompressible, and the situation is made worse, in the case of food, by the fact that for many families with children in school, confinement has led to increased food expenditure because many school systems provide school lunches that are no longer available to them because of the suspension of schooling.

Are there other possible margins?

Urgent request[5] for credit or more intensive use of existing credit facilities

The urgency of the situation places vulnerable households in a situation of unparalleled precarity. In such a context, the increased financial precarity of households can lead them to seek credit to help them get through this bad patch. However, there is no indication that they will have sufficient means to repay these loans once the health crisis is over. Borrowers know the problems they will have with repayment,[6] but what to do when they have no other choice? The credits available in these circumstances are most often made available by lenders specialising in short-term loans (payday loans, credit lines, revolving credit, etc.) [7]. It is clear that the crisis is exacerbating the classic asymmetry that prevails between the candidate borrower who is financially strained and the lender. In these circumstances, the validity of a contract, which should normally be based on the freedom of consent[8] of the parties, and cannot prevail when the borrowed money is essential for the survival of the household.

In addition to this argument, which is based on the philosophy of law, there is also the regulatory argument: lenders have an obligation to inform and advise borrowers before signing their contract and must check that the borrowers have the financial capacity to repay the credit envisaged (Art. 8 Consumer Credit Directive & Art. 18 Mortgage Credit Directive).

In the current uncertain conditions for household incomes, which are unlikely to improve for at least 12- or 24-months, the granting of new credit does not meet the criteria for responsible lending and should therefore not take place. Credit in such circumstances is not responsible, it only delays the inevitable, while worsening the chances of a return to normal in the future.

A credit is only suitable if there is a capacity to repay. Current circumstances create too much uncertainty about this capacity for credit to be considered as an acceptable response to the financial strains of households in a state of economic precariousness.

Deferral of payments / reduction of credit maturities

For precarious households that have taken out loans of any kind[9], a moratorium on a sufficient number of maturities[10] would provide relief to prepare for the exit from the crisis.

Such a moratorium would have the advantage of immediately reducing monthly expenditure. This reduction in expenditure could make it possible to compensate (in whole or in part) for the loss of income suffered, which would make it possible to balance the budget of precarious households without increasing the pressure on already constrained food or health/hygiene items.

In order to be operational, a solution of this type should involve both the public authorities and the credit sector (banking and non-banking) and should be developed within the framework of a joint effort, in order to avoid overly endangering the lenders.  Such a solution can even be to the advantage of lenders if it puts their loan books on a sustainable basis, rather than accumulating more bad loans. It is also a solution that is being explored, and has even already deployed, in some EU Member States.

Resolute and rapid action on this subject is essential to prepare Europe for a united and economically sound way out of the crisis, which is an obvious prerequisite for a sustainable and fair recovery.

In the longer term, the resilience of our society would also be strengthened by the implementation of measures such as:

• a common minimum income scheme,
• a personal bankruptcy scheme at European level,
• a precautionary savings scheme that is truly attractive to vulnerable people.

In summary, more consumer debt will not help precarious households or reputable lenders. Instead, now more than ever, we need to begin to tackle our private debt mountain.

Olivier Jérusalmy