Pandemic Puts Millions of Europeans on Path to a Debt Crisis

(Bloomberg) -- More economic upheaval is on the horizon in Europe as plans to end the unprecedented support for workers during the coronavirus pandemic threaten to tip millions of households into a debt trap.

Organizations that help individuals sort out their financial problems are warning of a sharp increase in the number of families burdened by bills they can't pay. Even in savings-rich nations such as Germany and Austria, citizens are starting to worry.

“In some provinces, we already see significantly more enquiries from people seeking advice compared to last year,” said Maria Kemmetmueller, deputy director of the organization of debt counseling agencies in Austria. “In the autumn, we expect an increase in counseling everywhere of as much as 40%.”

Such struggles are one of many threats to the economic recovery from the coronavirus. They undercut spending, and some studies suggest a risk to broader financial instability as defaults mount.

The European Consumer Debt Network, which tries to combat over-indebtedness, estimates that as much as 10% of European Union households already have a problem, and adviser Kosta Skliris reckons that will at least double.

A study by the Bruegel think tank in Brussels found that almost a third of European households reckoned they'd be unable to cover an unexpected expense even before this crisis. Southern European nations were found to have more “financially fragile” families.

The Resolution Foundation said this month that 44% of U.K. households before the crisis would be unable to cover their bills if they lost their main source of income over a three-month period.

The loss of a wage is s key cause of financial problems, so the full force of the pandemic has been kept at bay so far by furlough programs. Yet many governments, worried about their own debt burdens, are planning to wind down that support, potentially sending unemployment soaring.

“The need for advice is going to rise significantly,” said Roman Schlag, spokesman for the German association of debt counselors and a debt expert at Caritas, which has seen demand for online help rise 30%.

“The debtors will first try to cope themselves, sometimes fatally so,” he said. “At some point they'll realize they can't manage on their own, which is when they turn up in counseling.”

The issue underscores how the economic crisis threatens to aggravate inequality. The OECD warned last month of a particularly severe impact on low-earners, women, migrants and young people.

They are less likely to be able to work from home during lockdowns, and are often employed in sectors hit hardest by the coronavirus such as retail, tourism and hospitality.

Higher-earners could also be hit though. The self-employed are vulnerable as they tend to rely on a small number of clients and may not have access to all government support programs.

On an even broader scale, the European Central Bank cited household debt sustainability as one of the risks in its latest Financial Stability Review in May. Temporary relief from loan repayments could mitigate that, but only in the short term.

Dealing with the problem is frustrated by insufficient infrastructure such as debt-relief agencies. In many countries, debtors will be left in the hands of private lawyers, unregulated counselors or other organizations without expert knowledge.

Households will also turn to options such as payday lenders, despite ultra-high interest rates, according to ECDN's Skliris. Or they'll struggle to make their payment at the expense of missing others.

“People tend to draw out their situation out of reasons of shame or pride,” he said. “Often they try to fill a hole by digging another hole.”

©2020 Bloomberg L.P.