Expert Commentary

Micro Debt Deflation

The demise of another payday lender is more evidence of a world living beyond its means.

QuickQuid, the U.K.'s largest payday lender, has entered administration as it failed to reach agreement over compensation claims. This comes a year after its rival, Wonga, suffered a similar fate. Payday lenders are finance companies that make money from lending small amounts of money at exorbitant interest rates. QuickQuid has been deluged with thousands of complaints from customers who claim they were sold loans that they cannot afford. As a result, the company cannot afford to stay in business and is closing down.

Although the sums of money involved are immaterial in terms of the size of the U.K. economy, they are very much material in terms of the size of the borrower's economy. That is, their household income. And that is symptomatic of the attitude towards debt that has pervaded over the past decade at least. Whether you're a government, a corporation or an individual, borrowing money is now seen as a necessity in order to function. Complaining about being sold a loan that you cannot afford follows naturally. Not being able to afford a loan is, of course, just code for default and so what the demise of payday lenders tells us is that debt defaults are on the increase.

Indeed, Moody's Analytics show that default rates have risen over the past year in the junk bond and leveraged loan markets. Also, S&P Global Ratings point out that the number of "weakest links" among debt issuers has jumped to the highest level in a decade. Weakest links are defined as issuers rated 'B--' or lower by S&P Global Ratings with negative outlooks or ratings on CreditWatch with negative implications.

It seems that debt deflation could be a growing theme and that also comes through in the chart below which shows the relative performance of Visa versus the Financial sector in the U.S. stock market. Visa has been underperforming the Financial sector since August this year. With a similar story in Mastercard's share price, this could be evidence that attitudes toward debt may be changing and that a broader debt deflation is emerging.

Visa Inc Relative to US Financial Sector