In the Roadrunner cartoon series, Wile E Coyote is fated to run off the end of a cliff, but manages to perform the miracle of running so fast that he defies gravity for a few seconds. When he looks down, realising his predicament, he falls to earth.

Well that’s us, in Britain right now, or that’s my take on today’s Bank of England financial stability report.

If you were wondering, in spite of double, and possible triple-dip recessions, with our economy far from back to where we were pre-crisis, why house repossessions and company bankruptcies are so low, then the word you need is “forbearance”. To be clear, it is forbearance coupled with ultra-low interest rates*.


The UK Corporate insolvency rate is just 0.9 per cent compared with 3.6 per cent in the milder recession of the early 1990s.

8 per cent of companies are only paying interest and not reducing their debts according to the R3 insolvency expert survey, quoted today by the Bank of England. That means for 1 in 12 Uk companies “in the event of a rise in interest rates, they would be unable to afford to repay their debts at all”. (Actually a more up to date survey from the same organisation has this number at 9 per cent, or 1 in 11, or 160,000 “zombie companies”.)

Likewise the FSA has reported that 40 per cent of outstanding mortgage loans are interest only, and Moody’s says that figure is more than half in some parts of the country.

Between 5 and 8 per cent of UK mortgages have had some sort of forbearance say the FSA. A third of that number have had capital repayment mortgages converted to interest only.

As the Bank’s Andy Haldane pointed out today, there is “good forbearance”, which gives time to debtors who have temporary problems. But there is clearly a hefty chunk of “bad forbearance”.

Banks faced with debtors struggling to service debts have engaged in what the industry calls “extend and pretend”. Calling in rotting loans would actually mean that banks would have to realise losses. Further, it could add to a further downward spiral in commercial property prices, or start one in house prices.

The problem here is at some point a nation has to face up to these accumulated debts. Recent economic history points to the contrasting examples of Japan and Sweden.

Japan’s continuing “evergreening” of bad loans, slowly rotted its banking system’s capacity to lend to productive parts of the economy. Sweden had some painful shock therapy, but then recovered afterwards.

If you want some evidence of how bad zombie loans corrode our banks, how about this fact, again from today’s BoE report:

Just under a half of corporate lending in the UK is in the category of .. not high tech manufacturing, or pharmaceuticals .. but yes, “commercial real estate”. If it seems insane, then that’s because it is a spectacular misallocation of capital to a largely unproductive sector.

German industry must be laughing at how the UK’s credit-addled maniacs lectured them about how to stop being the “sick man of Europe”.

The problem is that more pain may be required to get through this. That is why Sir Mervyn King today implored UK banks to raise yet more capital. He wants them to pad up for a painful catharsis over the next year or two.

*This analysis also suggests you can forget interest rates going up for a very very long time. It’s rather handy that Mark Carney’s signature policy has been to pre-announce a long period of low interest rates.

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