The International Monetary Fund (IMF) is an organization that advances financial stability and monetary help, internationally. It promotes international trade, employment, and economic growth. This organization is run by a 189 membership from different countries.
Lately, the IMF has announced a surge in household debt which could very well lead to a financial crisis worldwide. They have stated that this crisis could lead to a negative economic impact.
A recent report said “higher household debt is associated with a greater probability of a banking crisis, especially when debt is already high. A sudden economic shock, such as a decline in home prices could trigger a spiral of credit defaults and debt that shakes the foundations of the financial system.”
This warning from the IMF was first announced after discovering the rising debt that has incurred in the United Kingdom. Since 2007, the levels of household debt dropped in the UK from 150% to 130% but have since risen to 137% over the past few years.
The most recent figures coming from the Bank of England has discovered that British households have unsecured debts of approximately £203 billion from car loans, credit cards, overdrafts, and other types of loans. There is a rising concern that lenders in the UK could lose well over 30 billion due to borrowers who are in debt and having a hard time paying these loans back.
Economist Claudio Raddatz, from the IMF, stated: “Growing debt levels signal risks down the road”. Although some economists believe that extra spending can actually help the economy but over time, spending and debt will lead to risks in the economy.
Economist Nico Valckx of the IMF said “Debt greases the wheels of the economy. It allows individuals to make big investments today, like buying a house or going to college, by pledging some of their future earnings to pay the debt incurred. That’s all fine in theory. But as a global financial crisis showed, rapid growth in household debt, especially mortgages, can be dangerous”.
The IMF has continually warned lenders that the increase in spending and debt is getting well out of control. More households are heading into debt once again which is a reflection of past financial crisis.
They are afraid that lessons of the last financial crisis and the negative impact it had on the economy has obviously not been learned by spenders. Consumers must become more astute regarding their spending and borrowing habits. If households continue on this slippery slope, it will show that people just have not gotten the message.
The IMF’s latest concerns remain to be seen but the increase in household debt could lead to another crisis within the country.