Subprime Cards, The New Threat In Us

For the U.S. economy recover the path of growth, household consumption is the vital element that should be encouraged. But today, American families are too many concerns to think about eating. And one of the many concerns are consumer debts that are becoming difficult to remove, in a context where card usage is so intense that the plastic and seems to "glue".

One factor that helped Argentina's recovery after the 2001 crisis was the stimulus to consumption through funding. Retail stores found in the use of the cards and the "easy installments, how to revive demand. Banks also found in the segment of personal loans and credit card, the niche to exploit to return to the ring.

The generation of credit card financing is an important resource for consumption in the U.S. economy. But hopes for revival of financing through the use of plastic have clashed with the vision of the rating agency Standard & Poor's for this market where bad loans credit cards begin to multiply.

S & P has a quality rating of credit cards, which measures loans that banks do not expect to be paid. In July, the index fell 9.8% after reaching its record high of 10.4% in June. But this improvement in the S & P index did not leave much room for optimism when one considers that its explanatory factors have been the change in the behavior of consumers who have opted for a more cautious attitude, and extra dollars from the stimulus plan tax were used by families to pay off old debts.

While the U.S. economy going day to day confirming his return to slow and smooth growth path, there still remains the deterioration in the labor market that continues to drive the unemployment rate to rise.

Most job insecurity is one of the above factors when predicting the rising levels of bad debt from credit cards. The increase in unemployment in August reached 9.7% of the Economically Active Population (PEA), in the U.S., hitting their highest level in 26 years, will impact on the results of the credit card companies as generally it does in similar situations.

If the persistence of unemployment is a factor which may complicate the percentage of partly uncollectible financing, rising very definitely exacerbates the situation. And it is a rising trend in unemployment that S & P is looking ahead and will probably reach a level between 10.4% and 12.7% in the next 12 to 24 months.

Estimates on the results of this segment, making it likely that credit losses from credit cards could climb between 10.5% and 13.0%, following the evolution of unemployment. I even believe that the situation could worsen.

In this context, the credit card market is deflating, but nevertheless, it is oversized. Just as happened with subprime mortgages, we can say that credit cards are subprime because they have been granted without reliable financial information of users of credit cards which have been allowed to borrow without restrictions. These users have not hesitated to use and negative consequences in this harsh environment will continue watching.

It is true that financing with credit cards have been falling. July accumulate its sixth floor (since 1991 that was not seen anything like it) and in that month, according to Fed data, funding cards shrank 10.4% in annual terms, with a total of U.S. $ 21.500 million less funding compared to July. The magnitude of contraction is concerned because there had been a drop of that magnitude since these statistics began publication in 1943.

While the decline in credit card financing worries about their impact on prospects for economic recovery, more worrying situation of much of the debtors. U.S. officials recently acknowledged to the Center for Credit Responsibility, their concerns about the overuse of credit cards you are giving families. According to Eric Halperin, director of the CRC: "If banks allow the card holder is exceeded more than necessary, people will pay more than their personal budgets will allow."

Faced with this situation of excessive overdraft, the Federal Reserve Board of the United States is considering introducing more regulation on banks not to allow users to overdraw in excess since the risk of a collapse in this sector for funding is significant and can lead to the U.S. economy to draw the dreaded W.

With the increased risk of default on the card segment, the supply of financing probably change its position by increasing the financial costs and tightening financial conditions that will eventually restrict anchoring in consumption negatively impacting the economic outlook.

But there is more negative in this context relates to regulatory changes that will impose a cap from February in commissions and interest rates that credit card companies are charging their customers. Before entering into force of such ceilings is the latent possibility that the card issuers decide to increase such charges, particularly against this background riskier.

This situation being experienced by this segment of financing is no doubt very bad news for big companies like American Express Co (AXP), Bank of America Corp (NYSE: BAC), JPMorgan Chase & Co (NYSE: JPM) Citigroup Inc (NYSE: C), Capital One Financial Corp (NYSE: COF) and Discover Financial Services (NYSE: DFS), which make up about 80% of the industry of credit cards.

Faced with declining profitability of the cards, on Monday last week, Citigroup decided to divest three credit card portfolios valued at U.S. $ 1,300 million, as part of the bank's plan to dispose of businesses that are causing huge losses. Citi Holdings will continue to manage those units during the first half of 2010: "So that buyers assume the customer service.

The U.S. financial system has lost so far this year 89 financial institutions. Last Friday, fell five regional entities and promise not to be the last. But despite this, the situation of the whole system seems to have stabilized Will the credit card segment that will again give a setback to the U.S. financial system by putting it at risk for another episode of crisis?