Households slower to feel the pinch

In recent weeks, economists and analysts have been eagerly pointing to the first faint signs of an economic recovery, as evidenced - according to them - by a decline that is not nearly as steep as it was in the final quarter of 2008 through the first quarter of 2009. Industry and financial services sectors may take heart at such data, but consumers and households have not hit the bottom of the recession yet, as individuals often lag behind institutions when bearing the brunt of economic downturns.

Prime Minister Jan Fischer acknowledged the growing burden on Czech households in his June 15 remarks delivered in London, and added that households would also recover at a slower pace.

"The first victims [of the crisis] are economic forecasters and statisticians. Entrepreneurs and firms come afterward, followed by households. The onslaught on households has not come yet, which is a problem," he said. "In the final stage of the crisis, entrepreneurs, shops and corporations are getting out first - households afterward."

Households are hit hardest in downturns by the lag of a growing unemployment rate. As orders drop off and industrial output sinks, reduced working hours and layoffs leave more and more homes with less income each month to pay bills. Even in advance of the recession, household debt had been on a steep rise in the past few years. In 2005, the ratio of household debt to disposable income was at 34 percent. Last year, the rate grew to 50 percent, up from 45 percent in 2007. A Czech National Bank (ČNB) report released June 16 cited worsening conditions on the labor market and lower disposable income as risks for deteriorating household solvency.

"The rise in registered unemployment to 8.1 percent in May exceeded the ČNB forecast," said Marek Petruš, director of communications at the ČNB. "Households are also feeling the pinch as a result of tighter credit conditions, with household credits falling 4.7 percent year on year. The degree to which the crisis will affect households will vary, but it is likely that low-income households will take the biggest brunt of the crisis."

Despite its steady climb upward, Czech household debt remains only at around 50 percent of the eurozone average, a discrepancy that results from retail banking services being a much younger industry in the Czech Republic, having been an option for only 15 years, said David Šmejkal, director of the debt advisory center. The center is a nonprofit that was created in 2007 by the Czech Consumer Association and Česká spořitelna to address the growing number of households that struggled with debt. Based in Prague, the organization opened a second branch in Ostrava in January and plans to open another in Ústí nad Labem at the start of next year.

At the end of 2008, the center had helped 4,100 clients. This year, the center has surpassed 5,000, and has served nearly 100 more clients in the first half of 2009 than it did in the entire past year, Šmejkal said.

Household debt to financial institutions grew to nearly 950 billion Kč in 2008, 65 percent of which was in household loans, 20 percent in consumer loans and the remainder in nonbanking loans, according to the ČNB. Defaulting on loans will likely become an even greater problem in the second half of the year, the ČNB report forecast, and, by the years' end, one in 10 homes could be unable to repay loans. Four percent of households had debts they were unable to repay at the beginning of 2009.

"According to our statistics and the general opinion I've seen from the public and the media, I can say yes, indebtedness is a growing problem," he said. "I'm hearing that more and more companies are reducing their activities, and it means that our clients, the people being affected, are mostly people with lower education."

In addition to a toll-free "green line" that people can call for advice, the center works as an intermediary between individuals and creditors to work out a more manageable payment plan, works with municipalities to increase financial literacy through free courses and helps clients draft bankruptcy filings to submit in court. Many of the center's staff used to work in the collection departments of financial institutions, Šmejkal added.

"They're experienced in speaking with clients and using enforcement methods to get money from clients. And, now, they're using this knowledge on the other side, to help clients."

Claire Compton can be reached at
ccompton@praguepost.com