Consumer debt spirals in the run up to Christmas

It is only mid-November but Czechs are already gearing up for a massive spending spree in the run up to Christmas. And it is not just salespeople who are expecting record profits: consumer debt is spiraling and in the euphoria of making their dreams come true here-and-now few Czechs are reading the small print.

With consumer prices reaching Western standards and wages lagging sadly behind, Czechs have enthusiastically embraced the Western concept of living on debt. Household debt in the Czech Republic has been growing by an average 30 percent each year and the overall figure has now reached 661.7 billion crowns. This amounts to a 60,000 crown debt per head. Even so, financial experts are not particularly worried. Tomas Sedlacek chief economic strategist at CSOB bank – says the Czech Republic is nowhere near as indebted as most EU states.

“We have seen quite a dramatic increase in consumer debt but when you compare our levels of consumer debt with the rest of the Western world and also to neighbouring central European countries such as Poland or Slovakia our level of indebtedness is extremely low. Our level of household debt would be around twelve percent of the GDP. It is average –in western Europe – for countries to have 60 to 70 percent of debt. So in that respect we are doing quite well. Consumer debt has only reached about 4 percent of the GDP compares to about 20 which is five times the amount in Western Europe.”

What does appear to be cause for concern however is the growing number of people who have trouble repaying their debts – and who tend to solve their problems by taking out new loans. Czechs are near the bottom of the European ladder when it comes to debt-repayment and in the last two years the number of people who have had their property seized by a bailiff has doubled to 309,000. A lion’s share of the overall debt is due to the growing popularity of mortgages but financial experts say that is not the problem. The problem is an accumulation of loans for expensive household equipment and exotic holidays which people tend to buy imprudently on the spur of the moment and on very disadvantageous terms. Tomas Sedlacek again:

“I think that people should always be very careful and read all the conditions very, very carefully. It is really a phenomenon that is new. It sounds very attractive when you first hear about it but then when you start paying – or even read the conditions carefully – you discover that it is not as favourable as it seems and it is in fact close to usury, so to speak. So people should be very careful about that and I think the newspapers have picked up on the subject and it has become a topic that people are aware of more and more.”

For those who have already fallen into the trap of disadvantageous loans Prague City Hall and CSOB bank are setting up a network of help centers where financial experts will offer advise for free. The first four will open in Prague at the start of December. By 2010 they should be operating in every bigger town and city in the Czech Republic.