News & Analysis

Will credit card defaults cause USD volatility?

Andrew Saks, Tuesday, 20 April 2021

The US Dollar is in absolute focus today, as both the S&P Dow Jones Indices and major credit ratings agency Experian made public its data relating to the amount of consumer debt that has resulted in defaults for the month of March 2021 across the United States.

Like many Western nations, the United States operates a debt-based economy, which relies on consumer borrowing to not only sell products to people wishing to have access to free and comprehensive purchasing power but also to drive ambition enough to ensure the public continue working and maintaining a healthy and diversified free market economy.

Such structures have been highly effective and represent areas of the world with extremely high standards of living giving rise to the idea that capitalism and freedom of choice via personal empowerment has been the most successful post-industrial revolution economic model, however the past twelve months have been completely unusual and have curtailed earnings opportunities, destroyed private enterprise across many Western nations and constrained the freedom of enterprise along with the size of the economies of the free world, whilst hampering those who now find themselves with far less income or opportunity with the same monthly financial commitments as prior to the lockdowns.

This has led to defaults on consumer debt, and on the other side of the Atlantic, some of the world's largest banks including Barclays cutting credit card limits from in some cases £25,000 to £1,000 despite perfect spending and repayment behaviour.

Perhaps they are taking pre-emptive measures as they know that a number of previously well-heeled credit card holders who may make use of those high limits could find themselves without an income and saddle the banks with unsecured debts.

In the US, the figures are quite interesting, as the country has had certain states in lockdown and not others, contrasting with Europe's draconian all-encompassing lockdowns.

Thus, the US data is quite startling.

Whilst the composite rate was one basis point higher at 0.54% for March, the bank card default rate rose 22 basis points to 3.15% which is a lot, whichever way it is looked at.

North American customers aren't defaulting on mortgages or car finance particularly more frequently than the very low figures in February, so these statistics show that cash-strapped Americans are letting their unsecured debt go before risking secured assets.

Four of the five major metropolitan statistical areas ("MSAs") showed higher default rates compared to last month. The rate for Miami increased seven basis points to 1.23% while Los Angeles rose six basis points to 0.50%. Chicago was four basis points higher at 0.59% and New York was up three basis points to 0.86%. Dallas was unchanged at 0.59%.

This should be a good indicator that volatility between the USD and its Trans-Atlantic major counterparts the EUR and GBP may rise, as the US is generally in good shape, with lockdown areas having suffered but the regions of the country without lockdowns such as Florida and Texas, both home to substantial populations and very high-tech and modern industry bases, have been doing very well and attracting talent from other areas of the country.

This has not been the case in Europe where lockdowns have been sweeping the entire continent and a year of closure has decimated the economy. I spoke to a bank representative today who handles small to medium sized business who told me that many have applied for insolvency or bankruptcy over debts of between just £20,000 and £50,000, knowing that their revenues will never be back to enough strength to pay the debts down having lost all their clientele.

It will be very interesting to see the full extent of default on consumer credit in Europe compared to the United States. When that data is revealed, the majors may well respond accordingly.

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