What is Government Debt

Government debt is also known as public debt, national debt or sovereign debt.
It is money owed by a central government to be repaid against future taxes or failing that by simply printing more money. (See quantitative easing below)
Governments usually borrow by issuing securities such as gilts and government bonds.
Personal debt (high though it is in the UK) is excluded from sovereign debt.

Questions Being Asked

What will happen to the Euro?
Which head of Government will be the next to leave office?
Will the Greek, French or Italian crisis cause the collapse of the Euro or even the European Union?
Will the UK be able to sustain growth and survive on these interest rates?
Is the USA improving or will we need to wait until after the presidential election?

Interest Rates as a Factor

Interest rates on borrowing by various governments reflect the wider finance communities confidence in the economic future of each country.
This can be seen as a risk weighting that is either political risk or economic risk (Recently it has been both)
In the Naughty Corner
Spain 6.1%
Italy 6.8%
Ireland 7.8% but getting firmer
Greece ???
Portugal ???

Getting By for Now
France 3.2%
UK 2.2%
USA 2.0%
Germany 1.8%
Swings and dramatic changes are still possible as countries and groups falter along the wayside.

Inflation in the UK

Low interest rates seem great news for the national economy.
Inflation at 5-6% is ‘inflating our national debt away’ as we pay 2% but the debt is worth 5-6% less. This is squeezing savers and investors who are paying dearly.
Safe havens that are using quantitative easing ( sorry printing money ) hope to rely on their central bank to buy up excess debt.

Jeremy Warner in the Daily Telegraph 15/11/11 says ‘International credibility is not the only reason why government borrowing costs are so low, and though there is indeed reason to celebrate in such low rates, they regrettably don’t seem to be benefiting the real economy very much. The Government’s hope was that the low interest rates that fiscal credibility has generated would boost private sector investment. It has not. ‘ So where too from here?

It seems far too soon to change course and we need to ‘tough it out’ at least until Europe settles down.
Confidence is crucial and improved financial/fiscal management must be given priority over new initiatives.
Stronger banks would help significantly to boost this confidence.

See also Problems with Government Borrowing on Economics Info.

So what can you do if you want to make a large purchase such as a Cycle, Furniture, Car or even an Artwork?

Supplier Credit

• Niche retailers know their market and customers.
• Many forward thinking owners are offering easy payment terms. This is credit or ‘tick’ as our grandparents may have termed it.
• The finance may be interest free for a lengthy period – I bet you have seen those sofa adverts that look too good to be true, no money down and yonks before you start to repay.
• ‘Moneyway’ helps retailers of musical instruments via a partnership with the Arts Council and Secure Trust Bank
• ‘Take it away’ is a retailers scheme now restricted to 18-25 year olds who need to acquire an asset but have no capital.

Point of Sale Loans

• Interest Free Credit is not an accurate term. Generally the retailer is paying or subsidising the interest cost.
• Niche finance companies target sectors like musical instruments-Secure Trust, Cycles-Blackhorse,  Hi-Fi and electrical goods -Barclays Partner Finance.
• Truly entreprenurial retailers create rent to buy schemes.
• Some suppliers to retailers are making it easier for the retail distributors by offering them trade credit extensions. The success of these initiatives relies on a low level of business failure and few or no bad debts.
• Car manufacturers generate a wide variety of schemes to incentivise vehicle purchase. They may be trade funded or via a financial intermediary.

Comment

• It seems to make sense for lenders to finance new and extra trade. That is how their customers make money and earn the ability to make repayments.
• If a buyer doesn’t ask they may not get so give it a go next time you need a big ticket item and see what is on offer.
• Credit card debt is expensive and generic.
• Retention of title to the particular goods by the retailer can help offset the risk. If there is no repayment the seconhand value would go part way to covering the retailers losses.

References

Take it Away

Moneyway

Methods of Buying Using Credit

Hire Purchase involves paying for the entire cost of the asset such as a car by regular installments. You then own the asset once you have paid all the installments and a final nominal transfer fee. In addition to cars this type of credit is often used for furniture and white goods. The interest rate and regular installments are generally fixed.

Lease Hire involves paying regular installments but the ownership of the asset (car, furniture, machinery or whatever) remains with the lessor and doesn’t becomes yours. Rates of interest are normally fixed but can be variable.

Credit Cards are widely used to avoid carrying too much cash. You can pay off the full balance each month without incurring interest charges. (The retailers pay the credit card companies for each transaction).
When you get a credit card there is usually a limit place on the maximum amount you can have outstanding. If you do not repay the full balance when you get a statement you will be charged interest. Monthly interest can vary and the annualised rate can be quite high.

Store Cards are a form of ‘loyalty’ credit card issued on behalf of retailers for use in their branches. They operate like restricted credit cards and will be influence your personal credit rating.

Catalogue credit is provided by the supplier when you buy through a catalogue. The goods are delivered to your door and you can usually spread the cost of your purchases over a series of small weekly payments.
Beware interest may be hidden where the price of the items is higher than you can get them elsewhere.

Bank Overdraft is where you banker allows you to spend more than is in your bank account. It is cheaper to have pre-agreed the amount of overspending/overdraft. Unapproved overdrafts are expensive in interest and charges and may lead to your account being frozen or payments refused.

Personal Loans are available from several sources and interest rates increase in proportion to your credit risk and the type of lender you deal with.
Local credit unions may offer good rates but Wonga and weekly collection companies will have very high interest charges.

Mortgage & Secured Loans are used to borrow larger sums for example when buying a property. The asset is pledged as security but is at risk and can be sold by the lender if you breach the repayment rules.

Pawn Broking is a special form of secured lending where a loan is made in exchange for you leaving something valuable with the pawnbroker. You have a fixed period of time, to pay back the loan plus any interest, to get back the goods.
If you can’t repay your loan the pawnbroker can sell your goods to recover the money.

The Tick and the Slate are forms of informal often unstructured personal credit. To be safe you should know and trust who you are borrowing from.

Loan Sharks are unregistered, illegal money lenders that you do well to avoid. If you’re desperate, they’ll lend you money when no-one else will. Interest will be very high and compound aggressively.

Credit Traps

• Interest-free credit deals allow you to ‘buy now pay later’. If you don’t make the payment by the due date, you end up paying interest at a higher rate on the whole amount.
• Many credit companies rely on the fact that you won’t be able to make the full payment on time. Keep a close eye on your finances and do what said you would do.
• Unscrupulous lenders want you to borrow more and more. Be extremely careful before borrowing to repay another loan.
• “Buy now and pay nothing until next year!” deals may sound great but in the long run, with inflated product prices, they cost you a lot more money. That is how and why furniture companies are always running these promotions.
• The small print is the ‘catch all’ trap. Who but lawyers can read and understand the contract terms and conditions. Deal with companies you know and trust and have a reputation to protect.
• An interesting case study was created by the BBC to expose some credit card scams and traps. Read here

The cost of borrowing wholesale money over two years has increased to over 6%. 1% higher than base rates. This is the biggest spread for almost 4 years and a sign of the shortage of liquidity and reluctance to lend

This increase in two year interest rates will directly affect the cost of fixed rate mortgages. Banks will also be forced to continue rationing mortgages and mortgage products for the foreseeable future.

See: Credit Crunch explained

Credit Crisis 2008

Understanding subprime crisis

Also, it is worth bearing in mind, that if it is only a few days late many financial institutions will not let it count against you,

If you do miss a payment it can count against you for upto 6 years. If you have only one missed payment, it will be unlikely to stop you getting most loans. However, if you have a history of missed payments then it will become increasingly difficult to get loans. As a consequence, you may end up only able to get high interest bearing loans from adverse credit specialists.

Related:

• Top 10 Tips to improve your credit rating
• Adverse Credit Mortgages