Debt interest to hit $100 Billion

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New Zealand report

Government debt will climb to intolerable levels by the middle of the century on present policy settings and this is a problem that we cannot simply grow – or tax – our way out of, according to Treasury projections of the long-run fiscal outlook.

That leaves a focus on spending.

The projections have the Government’s net debt, which stands at around 16 per cent of gross domestic product, climbing to 223 per cent by the middle of the century, compared with just over 100 per cent in the previous projections made in 2006.

If that happened the interest bill would be more than $100 billion a year and would dwarf any other item of Government spending.

About half the deterioration since 2006 is the legacy of the financial crisis of the past two years – an end to fiscal surpluses and a shrunken tax base. The rest reflects higher costs of existing programmes and changes to Government policy

Treasury Secretary John Whitehead stressed that the projections are not forecasts of what will happen, but rather where policy, demographics and past trends in factors like productivity growth and migration would take us over the next 40 years if nothing changed.

The projections assume productivity (or per capita GDP) growth of 1.5 per cent a year, in line with the long-run historical trend, and a net migration gain of 10,000 a year. But even if productivity growth lifted to 2 per cent, the migration gain was 15,000 a year and the labour force rose significantly from its already internationally high level, the Government’s net debt would still reach an unsustainable 146 per cent of GDP by the middle of the century.

“Growth alone does not solve the fiscal problem,” Whitehead said. Higher productivity means higher wages, and New Zealand Superannuation is indexed to wage growth, too.

The impact on the fiscal position of another $1 of GDP from higher productivity would be to increase the tax take by 33c but, when that is offset by higher superannuation and public sector wage costs, the net gain to the Government is about 13c.

Higher taxes would reduce fiscal deficits but at the expense of weaker economic growth. READ MORE

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Debt Collection Booming Business

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WASHINGTON — In the often murky waters of the debt collection industry, United Recovery Systems in Houston is considered a “whale hunter.”

In its search for clients, United isn’t looking for mom-and-pop businesses with a few hundred deadbeat customers. It wants bigger fish.

Its client roster includes national banks, international credit card issuers and domestic and foreign auto finance giants, each of whom count on United to make good on their bad accounts.

In the current economic climate, the “whales” are virtually jumping out of the water and into United’s boat. The company is taking in $937 million a month in new accounts, compared with about $550 million a month last year, said United’s marketing director, Sean Keegan.

After beginning the year with 1,200 debt collectors, United has added 300 and will add another 300 by year’s end.

“The volume was so huge that we had to run out and hire collectors,” Keegan said. “I can’t put 5,000 accounts in this guy’s file box for him to work this month. I have to go hire new people.”

United’s growth spurt isn’t an aberration. Across the country, dozens of established collection agencies are expanding their operations and hiring collectors, managers and support staff to keep up with the rising tide of bad debt due to massive job losses.

As real estate values fall, homeowners can no longer tap their home equity to pay down debt. So antsy creditors are farming out more problem accounts to collectors after declaring them as charge-offs, or losses.

With billions of dollars outstanding on millions of past due accounts, creditors want their money now and collection agencies with a track record of success are cashing in. READ MORE

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NZ Debt Facts and Figures

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New Zealand debt forecast for the future

•Treasury estimates showed that without policy changes, gross government debt would rise alarmingly, reaching 48 per cent of GDP by 2013 and 70 per cent of GDP – or about $227 billion – by 2023.


•That level of debt equates to just over $45,000 for every New Zealander. Put another way, it would represent $180,000 of government debt for every family of four – equivalent to a second mortgage on their home.


•Paying interest on that debt would have cost the Government $13.7 billion a year – more than is currently spent on the public health system.


•Debt last peaked at more than 70 per cent of GDP in the 1980s and it took almost 20 years of tough decisions to bring it back to prudent levels.


New Zealands national debt is forecast to reach a maximum of 43 per cent of GDP in 2016/17 and to reduce to about 37 per cent in 2022/23.


The previous net debt indicator is around 2.5 per cent of GDP and the new net debt indicator is around 9 per cent of GDP. Over time, the difference between gross debt and the new net debt indicator narrows because debt is rising faster than financial assets.

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Australians dealing with bad debts

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Veda Advantage bi-annual independent data reveals while most Australians have weathered the tougher economic conditions well, some Australians are struggling with financial obligations and may become caught in long-term debt.

The Australian Debt Study Report by Galaxy Research found 16% of Australians are having difficulty repaying debts and 21% of those who are likely to apply for credit over the next six months say they are currently having difficulty paying debts.

Furthermore, almost 23% of respondents struggling to repay bills owe more than they did 12 months ago.

While the majority of Australian families are managing credit responsibly and continue to pay down debt obligations, a small, but sizeable population of Australians are struggling – creating a debt divide. Veda Advantage General Manager Market and Product
Development Russell Evans says under current laws this group can be invisible until it’s too late. Urgent government action to add comprehensive credit reporting to the government’s credit reforms is needed.

Helping lenders prevent these families falling into a debt trap should be a high priority. But government legislation to allow lenders to see when a borrower is overcommitted is facing continued delays.

Legislation to implement comprehensive credit reporting, an early warning system for borrowers and lenders has still not been drafted despite government committing to legislation within 18 months of August 2008.

Veda Advantage’s report indicates:

More than one in ten (12%) of Australians have missed a required minimum payment in the past three months, with many missing two or more essential household payments. Of the people likely to apply for more credit one in five (18%) have missed a bill payment in the last three months.
Of those Australians with a mortgage, 13% were late paying a household bill in the past three months. One in three respondents is concerned interest or mortgage rates will impact on their ability to repay debts during the next twelve months.

Mortgage holders aged between 25 – 49 years are three times more likely to miss a payment than those over 50 years. Mortgage holders were most likely to miss a telephone or internet bill, followed by a mobile phone bill, credit card, utilities and personal loan repayment.

More than 20% of Australians currently struggling, are likely to apply for more credit in the next 12 months.

Although Australians experiencing financial difficulty aspire to pay off their credit cards, one in five is likely to apply for new credit in the next 12 months.

Australian part-time workers are more likely than full-time workers to apply for new credit to consolidate existing debts.

Australians currently finding it difficult to repay bills are more likely to have children and are more likely not to be working, or working on low incomes.

Australians living in regional areas are worse off than their city counterparts.

Russell Evans, Veda Advantage General Manager Market and Product Development, said it is concerning to see a significant number of Australians are likely to apply for credit despite struggling to meet current financial obligations.

“Credit providers simply don’t have all the tools they need to implement new responsible lending laws, making it difficult for them to detect some struggling individuals.

“Sixteen percent of Australians with debt are finding it difficult to make their payments. This indicates some of these people are in a high risk category, and may seek to take on more debt despite not meeting current financial obligations. There is a real risk these vulnerable individuals will become caught in debt.

“The Federal Government is to be congratulated for implementing new responsible lending laws , but needs to give credit providers the tools they need now.”

“A simple change to the credit reporting laws will allow credit providers to check a borrower’s current credit commitments and repayment history before additional credit is granted. This would protect families from taking on more debt at a time when they need assistance to help them out of debt.

“The Government’s responsible lending legislation, which should pass by the end of the year, is a first step in the right direction to help these Australians. However it won’t be enough. Without access to more transparent information, lenders will struggle to identify families and individuals who are in financial difficulty.

“The Government’s current timetable means this comprehensive credit reporting may not pass for 18 – 24 months – too late to help protect these vulnerable Australian families.

“Australia needs to adopt a comprehensive reporting system. There is a window of opportunity to introduce this change, however this requires swift action,” Mr Evans said.

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City of Debt

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DUBAI, UAE — Default on a loan or bounce a check in Dubai and you could end up in debtors’ prison.

That was the very Dickensian prospect facing Simon Ford, a boyish British entrepreneur whose “alternative gift” business sold rides in hot air balloons and Formula 1 racing cars to the party crowd in this Disneyesque city-state. But the recession has hit Dubai hard and Ford’s business foundered.

When his loans came due last June, he did what thousands of other expats have done. He packed up his family and fled — a few hours ahead of the law.

Ford also left behind an anguished “open letter” to friends and creditors that neatly encapsulates the predicament of many expats in Dubai who took out loans during the flush times and now find themselves out of work and unable to keep up with the payments on their seaside villas and luxury cars.

“I am not running away from debt, I am purely protecting those dearest to me and getting out of a country which, due to the lack of structured bankruptcy laws and a banking system which has zero flexibility on loan repayments, drives people to make horrible decisions,” he wrote in an open letter to local media.

He promised to repay all of his creditors.

Dubai authorities won’t say precisely how many people have been jailed for their debts, but local news accounts put the number at about 1,200 — more than 40 percent of the total prison population.

Even trickier to gauge is how many others took Ford’s route and simply fled. Judging by the number of apparently abandoned BMW’s and Mercedes gathering dust on city streets and the ensuing chatter on expats’ discussion boards, the number is not insignificant.

One recent escapee has written a book about his flight. Herve Jaubert, a former French intelligence agent who used to cruise around Dubai in a red Lamborghini, found the law breathing down his neck after his plans to manufacture “luxury submarines” became submerged in debt.

Jaubert explains that he bolted last year after government interrogators threatened to stick needles up his nose. With 007 panache and a woman’s all-encompassing burqa concealing his frogman gear, Jaubert slipped into the sea, swam out to a police patrol boat and disabled its fuel line so that it could not give chase. He then used a rubber dingy to get safely beyond the UAE’s territorial waters where he was met by a confederate in a sailboat. Eight days later they landed in India.

The book, “Escape from Dubai” comes out next month. But Jaubert’s website has been blocked in Dubai and sale of his book will no doubt be banned here. The Frenchman, now living in Florida, was tried in absentia and sentenced to five years imprisonment for fraud.

A number of U.S. citizens have been imprisoned for bounced checks, but the American Embassy — apparently in keeping with the local custom of casting a veil of silence over disturbing news — declined to provide specific figures

Read more

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Debt reduction ; How to reduce debt

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Some very helpful advice from Wells Fargo on reducing debt

Does your debt outweigh your income? Do you find yourself only able to make the minimum payment on your credit card? Have you gone from using one credit card to two, three, or more? These are some of the standard warning signs of debt. If you recognize any of them in your own financial picture, take action to get your debt under control. Consider the following:

FIGURE OUT WHERE YOU STAND
Before you make a plan to get out of debt, get a sense of where you stand financially. Look over your outstanding debt — credit cards, car payments, mortgage, and student loans — to help you determine what your true needs are and what obligations have become hardest to manage.

Create or revise your budget based on your income and your expenses. Figure out how you can cut back on what you’re spending.

MAKE A PLAN

Call your creditors if you can’t make a payment or need to make a partial payment. Talk to them about payment plans you can afford. Creditors will want to work with you to find a solution. Also consider these options:

Pay off the highest-interest debt first. First pay off the balances of loans, lines of credit, and credit cards with the highest interest rates. Continue to pay at least the minimum due on your other accounts, especially one as important as your mortgage.

Refinance your mortgage. If interest rates have dropped since you took out your mortgage, consider refinancing to lower your monthly payments. You can also accomplish this by increasing the amount of time you take to repay your loan, or by changing the type of mortgage loan you have.

Consolidate your debt. Rolling all of your debt into a single loan won’t immediately reduce your debt, but it may reduce your monthly payments, and having just one bill will make tracking and payments easier.

If you’re a homeowner, you have the additional option of consolidating debt through refinancing or home equity financing. This may allow you to save even more through tax-deductible interest

Limit your credit use until your finances are under control.
See a credit counselor to help you explore your options and make a plan to get you out of debt.

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Debts called in on NZ property developer deals

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NZ Herald reports

Who will mourn the financial ruin of private property developers? Each week brings the fall of more members of this high-living, once-powerful band.

One day, it seems, they have the best clothes and are seen about town with the best-looking models, behind the wheels of the raciest cars.

Now they are crumbling under their creditors and even hocking their bling on the internet.

This week, Starline Group’s Jamie Peters announced his bankruptcy after putting his name to about $1 billion worth of development work.

He’s the developer who was selling his belongings on the internet a while back, including Cartier and Rolex watches, furniture and even his garden palms.

Peters estimated he had sold more than 1500 properties, starting in 1994 on residential work, buying and selling residential units then moving on to bigger commercial jobs and eventually developing part of Gulf Harbour, Quay Park and big Auckland office blocks.

“I am a proud man and did not want to become bankrupt. I have not run away from my problems. I have dealt with almost every funder face to face over the last two years and with most of them we have resolved the issues,” Peters says.

But he could not resolve problems with funder Bank of Scotland International, nor repay $100 million in loans.

Peters is not alone.

Princes Wharf’s David Henderson of Kitchener Group has Inland Revenue lodging a bankruptcy application against him in the High Court at Auckland for $3.5 million.

Christchurch’s David Henderson – also a developer – has had three of his companies put into liquidation. Others are in receivership and the 31ha $1 billion Five Mile project at Frankton Flats outside Queenstown lies barren.

Mark Bryers, former Blue Chip boss, went bankrupt this month and to add to the misery of this sorry tale, two Blue Chip investors lost their High Court case last week.

Nigel McKenna of Melview Group has two companies in receivership, failed to proceed with Flat Bush in Auckland and has scaled back work.

Greenlane’s Neville Mahon has trouble at the Fiji Beach Resort & Spa managed by Hilton. Last month, his Denarau Investments and Denarau International went into receivership. Investors who own apartments there are working with receivers KordaMentha.

Patrick Fontein’s Kensington Park went to KordaMentha for a time, then rich industrial developer John Sax bought it. He plans to finish the Orewa housing project but in a scaled-back format.

Korean developer Dae Ju wanted to build a $450 million 67-level Elliott apartment tower almost up to the Sky Tower. It was planned to be ready before the 2011 Rugby World Cup.

Asked about progress, New Zealand representative and lawyer Marcus Beveridge this week responded: “No building yet, busy trying to get projects out of the ground.” READ MORE

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Boomers, defaulters and bad debts

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NZ Herald reports

Veda Advantage managing director John Roberts said he had warned a year ago that the “interest-free – two years to pay” type deals would create problems and it appeared that was now the case.

“The statistics show the lifestyles of the baby boomers are coming home to roost – they are defaulting on debts mounted up over the years which they can now no longer service.”

Roberts said many in the baby boomer generation had bought consumer goods on their mortgage and the defaults were likely to be a result of people losing their jobs.

He said that anecdotally he had also heard more baby boomers were affected by redundancies than those in the younger generations.

At the same time people had also seen their personal wealth shrink and those who had higher debt levels were now facing the possibility of having to consolidate debt.

“Their loan-to-value ratio might have been 80 per cent and is now 105 per cent.”

But not all baby boomers were feeling the pain of debt overloading. The baby boomer generation also had the highest increase in mortgage applications so far this year.

Overall applications were up 12.99 per cent but for baby boomers the increase was 18.56 per cent. Read more

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NZ Property developer bankrupted over $100 Million debts

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New Zealand Herald reports:

Influential property developer Jamie Peters is bankrupt.

The ex-NBR Rich List Aucklander, who is related to Winston Peters and says he has bought and sold real estate worth more than $1 billion, was declared bankrupt in the Auckland High Court after an application was filed by Marac Finance.

Marac was seeking $3 million in outstanding debt.

But yesterday, Peters said a $100 million debt brought him down.

Peters appeared on the Rich List in 2005 with $40 million and in 2006 with $45 million. His Starline Group was involved in large developments around Auckland’s CBD, in Wellington and on northern waterfront land.

“I am exposed to personal liability for debts in excess of $100 million as a direct function of the current global credit crisis which I simply do not have the ability to repay,” Peters said yesterday.

“This issue has similarly affected other individuals involved in development, as well as large organisations such as my primary funder Bank of Scotland International [BOSI].” Read more

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Farm NZ$200 million in debt

New Zealand’s largest family owned dairy business, Crafar Farms, has been put into receivership by its banks Westpac, Rabobank and PGG Wrightson Finance. Read more

The banks are owed around NZ$200 million and put KordaMentha partners Michael Stiassny and Brendon Gibson in as receivers early on Monday afternoon after Crafar Farms breached covenants on its loans.

The group owns 22 farms with 20,000 cows across the North Island’s Central Plateau, the Manawatu and the Waikato. Crafar Farms (CraFarms) has around 200 workers and is supplying tens of thousands of litres of milk each day to Fonterra.

CraFarms’ banks have been working for almost a week with the Ministry of Agriculture and Forestry, Federated Farmers and Fonterra to ease the Crafars out of their business. This follows multiple convictions for environmental lapses and animal neglect in recent years and the revelation last Monday from interest.co.nz of animal neglect on one of its large farms in the King Country near Benneydale.

Agriculture Minister David Carter ordered an inquiry into animal neglect into CraFarms last week and said the Crafar family, including its leader Allan Crafar, needed to be out of the industry. The revelations about animal neglect have shocked the dairy industry and raised questions about the sustainability of large herd dairying in the wake of the explosive debt-funded growth of the last decade Read more

Comsumer delinquencies on climb

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WASHINGTON – Continued job losses, shorter work weeks and falling incomes are being cited as major factors in another record rate of consumer delinquencies in the second quarter of 2009, according to the American Bankers Association’s Consumer Credit Delinquency Bulletin. Delinquency rates hit record quarterly highs in three key loan categories: home equity loans, home equity lines of credit, and bank cards. The composite ratio, which tracks eight closed-end installment loan categories, also hit a record high at 3.35 percent of all accounts (seasonally adjusted) compared to 3.23 percent of all accounts in the previous quarter. The ABA report defines a delinquency as a late payment that is 30 days or more overdue.

ABA Chief Economist James Chessen said the high consumer credit delinquency rates represent the cumulative effect of the longest recession since the Great Depression.

“Six consecutive quarters of job losses have taken their toll,” Chessen said. “With jobs lost and work hours cut, it doesn’t take long for the financial pressure to become overwhelming. Falling behind on debt payments is an unfortunate side effect of high unemployment and a frozen job market. The picture won’t change until the labor market improves and the economy picks up steam. This is going to take time,” Chessen added.

Bank card delinquencies rose 26 basis points to a record 5.01 percent of all accounts. Record delinquency rates occurred in home equity loans – up 49 basis points to 4.01 percent of all accounts – and in home equity lines of credit – up three basis points to 1.92 percent of all accounts.

Auto loans, however, saw improvement. Direct auto loan delinquencies fell 55 basis points to 2.46 percent of all accounts and indirect auto loan delinquencies (arranged through auto dealers) dropped to 3.26 percent of all accounts from 3.42 percent in the previous quarter.

“The good news is that consumers are clearly being more cautious by saving more, spending less and making great efforts to repair their balance sheets,” Chessen said.

The second quarter composite ratio is made up of the following closed-end loans. All figures are seasonally adjusted based upon the number of accounts.

Increased Delinquencies:

Home equity loan delinquencies rose from 3.52 percent to 4.01 percent.
Marine loan delinquencies rose from 2.04 percent to 2.28 percent.
Personal loan delinquencies rose from 3.47 percent to 3.90 percent.
Property improvement loan delinquencies rose from 1.46 percent to 1.79 percent.
RV loan delinquencies rose from 1.52 percent to 1.72 percent.
Decreased Delinquencies:

Direct auto loan delinquencies fell from 3.01 percent to 2.46 percent.
Indirect auto loan delinquencies fell from 3.42 percent to 3.26 percent.
Mobile home loan delinquencies fell from 3.70 percent to 3.53 percent.

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