Debt and child poverty

A new report from the Child Poverty Action Group out today demonstrates the impact that debt has on exacerbating child poverty.

The report highlights the high cost of credit for people on lower incomes, due to bad credit ratings:

Once access to mainstream lenders is lost and friends and family are unable to assist, people on low income may resort to loan sharks. Because they will be charged an annual interest rate of 25% to 500% or more, plus administration, they may be trapped forever by the debt.

“Or more” can have a pretty broad definition – in 2012 a loan shark was prosecuted by the Commerce Commission for charging interest rates of up to 1,738%. He was charged under the Credit Contract and Consumer Finance Act for failing to disclose the full name and address of the lender, failing to specify interest rates, and misleading consumers as to the method of calculating the interest rate.  This notwithstanding, these breaches were with regards to how the lending was done – there is currently nothing in NZ law from stopping a loan shark setting interest rates at these levels.

Next, the report goes on to highlight how other countries ‘cap’ interest rates on loans. Australia caps interest rates at 48%, and while the UK has no cap the new Financial Conduct Authority will soon have the authority to take action against behaviours that harm consumers. In 37 states in the US payday lending is legal but regulated, with maximum rates set. 21 EU states have all incorporated the concept of ‘usury’ into the civil and criminal codes. Japan, South Africa, Canada and Ireland all impose caps. NZ is lagging behind – the Credit Contracts and Financial Service Law Reform Bill 2013 currently before the house has no provision for interest rate caps.

The report goes on to provide five case studies, breaking down the day-to-day arithmetic of poverty and debt:

  • A ‘good’ debt story where a couple take on a loan at 5% to buy a house, repayable in twenty years.
  • A single person with a student loan.employed 35 hours a week on minimum wage ($407.70 per week after tax). She takes on an overdraft to purchase a TV and stereo and purchases an iphone and work clothes on her credit card. When her father dies Anna takes on a $2000 loan at 39% to contribute toward the funeral costs, with $70 repayments for the next 18 months. 3 years layer she has moved home to reduce outgoings, since every missed repayment incurs a $400 administration charge and a 55% penalty rate.
  • A family of two adults (together working 30 hours at minimum wage) and two children assisted by Working for Families are forced to call on a fringe lender to cover medical, power and clothing costs. They borrow $400 at 10% a week with a 10% admin charge. In 10 weeks they have repaid $500 but the loan is still $344.12. After needing to borrow more and then missing repayments, their debt balloons to $2000.
  • A single mother on the DPB with three children (not working so does not qualify for in-work tax credit) who is suffering from depression misses job training and refuses to attend an interview, forcing her to call on the fringe lender.

The report details how child poverty affects NZ’s mental health (such as NZ’s high youth suicide rate), physical health (diseases like rheumatic fever, bronchiectasis, school sores and boils are associated with poverty), housing (cold, overcrowding), education and lifetime prospects.

How does this relate to banks? Banks and loan sharks have a symbiotic relationship. Where a customer cannot make their bank repayments, banks’ debt collection services encourage their customer to seek capital from other sources – family, friends and other lenders such as loan sharks. As a result customers can end up paying two sets of interest – to the bank on the initial loan repayments and to the loan shark.

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Sustainable Westpac?

This Tuesday Westpac bank’s General Manager Business Banking and Wealth Simon Power (yes, that Simon Power) had an opinion piece in the New Zealand Herald describing Westpac’s 2013-15 ‘Sustainability Strategy’.

That strategy focuses around five key areas “to help us roadmap and benchmark our contribution to long-term sustainability”, those being:

  1. cleantech investments,
  2. building sustainable financial futures through education and access to social and environmental housing,
  3. ensure their workforce represents a changing population and has access to flexible work options,
  4. contributing to communities locally, and
  5. ensuring our operations are sustainable by reducing our carbon footprint.

A few hours later the NZHerald had another article about Westpac, this time picturing Power alongside ‘Greenhouse’ director Duncan Stewart  a specialist consultancy that provides commercial insight on clean-tech and low carbon business capabilities. Westpac were proudly unveiling a $150 million funding infusion over the next two years. Westpac head of sustainability Grant Fleming said that renewably energy, green building, forestry and waste reduction enterprises were all potential targets.

In fact, it would appear that this almost par for the course for Westpac, and in January they were named the most sustainable company in the world at the World Economic Forum in Davos.

It sounds pretty good, right? The $150 million Westpac are investing in clean tech may only be a fraction of their recent profits, but it’s definitely a step in the right direction. 

However this investment sits uncomfortably alongside Westpac’s financing of Bathurst Resources, the cash-strapped mining company that wants to dig up some 84 million tonnes of coal from the Denniston Plateau and release 218 million tonnes of carbon dioxide into the atmosphere. 350.org.nz, a grassroots climate change organisation, has been campaigning against the mine, and is encouraging people to tell Westpac how they feel and shift their money to a different bank.

Investments in fossil fuel are increasingly subject to criticism, not just for their climate change risk, but for the financial risk that emanates from this. A report from the Carbon Tracker Initiative argues that given the global carbon budget required to reduce the risk of exceeding 2 degrees of global warming

“investors are thus left exposed to the risk of unburnable carbon. … [O]il and gas would be subject to impairment as these assets become stranded.”

In other words, fossil fuel investments are part of a big speculative bubble that will crash sooner or later, adding greater risk to the financial system itself.

Further, we need to remember that climate change carries with it critical social implications to radically magnify inequality. As Andrew Winston writes in the Guardian:

the divide between environmental and social is mostly artificial, and that’s especially true with climate change. Our changing planet is the ultimate social issue, since those with the fewest resources are least able to adapt. Remember the Titanic? When the ship went down, the people in steerage were hit hardest. In climate terms, the increase in flooding and sea-level rise will have the greatest impact on many of the poorest regions, such as Bangladesh. And the outcomes from a changing climate, including droughts that destroy crops and raise food prices, are hardest on those who can least afford it.

So, while it may be great that Westpac is investing clean tech and has a fancy sustainability technology to boot, perhaps it should look more closely at its existing investments before it goes blowing its own trumpet all over the show.

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Are ANZ financing ‘blood sugar’?

Recently sugar’s been getting a bit of a bad rap.  Health experts have this gathered in Auckland in February at the Fizz symposium, aiming to highlight the role of sugar, and sugary drinks in particular, in fueling obesity in NZ. A recent poll shows that 46% of kiwi adults think there should be “definitely” be limits on sugar in drinks and further 32% said “possibly”. Excessive sugar consumption is linked to obesity, heart disease, tooth decay, and premature ageing.

But this isn’t the only impact the food industry has on blood sugar. Sugar plantations are leaving a trail of suffering and human rights abuses in Cambodia, and NZ’s most profitable bank, ANZ has been implicated.The bank came under scrutiny last month over allegations of financing a Cambodian sugar plantation that has been responsible for child labour, military-backed land grabs, forced evictions and food shortages.

ANZ are  alleged to have financed a 23,000 hectare sugar plantation through its Cambodian subsidiary ANZ Royal Bank. The project was run by Phnom Penh Sugar and situated in the impoverished Kampong Speu province of Cambodia. The plantation is made up of three adjacent blocks, two granted in February 2010 to ruling party Senator Ly Yong Phat and his wife, and another granted in 2011 after protected land was reclassified by sub-decree of Prime Minister Hun Sen. Yong Phat’s political connections allow him to flout the Cambodian Land Law, which limits land concessions to 10,000 hectares. He has interests in ten sugar and rubber plantations and a special economic zone, totaling 86,000 hectares.

A 2013 human rights impact assessment of Cambodian sugar supply chains notes the surge in forced displacement resulting from Cambodian land concessions to develop sugar plantations.It describes the forced eviction of local farmers whose land and homes lay inside PPS’ concessions:

With no prior notice and no court order, company staff accompanied by military, police and local authorities began clearing the villagers’ land in February 2010. One village, Pis, was totally destroyed and its residents were forcibly relocated onto small residential plots of rocky land at the foot of the mountain. During the clearing, some of the resident were instructed to collect 25 USD for moving costs at the office of the sugar company.

In all areas studied these farmers lost rice, small plantations and orchards, livestock, and other common resources that sustained their livelihoods.  1805 hectares of forest in Kampong Speu was destroyed to make way for one concession.

Accusations of neocolonialism have been leveled at similar instances landgrabbing that have become common across Southeast Asia. According to the Clean Sugar Campaign:

In rural areas, more than 2 million hectares – 12 percent of Cambodia’s total landmass – has bee granted to private companies as concessions for the development of agro-industrial plantations … Over the last several years there has been a rapid expansion in the Cambodian sugar industry, with at least 75,000 hectares in land concessions being granted to private companies for industrial sugarcane production.

Responding to questions from the Sydney Morning Herald a representative of Phnom Penh Sugar, has vigorously denied the allegations. However if the allegations are correct, they reflect extremely poorly on ANZ. ANZ are one of 79 signatories to the Equator Principles, a risk management framework adopted by financial institutions for assessing environmental and social risks.

In 2006 ANZ’s  financing of an OceanaGold mining project in the Philippines which was similarly marred by accusations of forced evictions, threats of violence, public misrepresentation and the illegal demolition of homes. Investigation by the Philippine Human Rights Chairperson confirmed the claims, and a case proceeded against Oceanagold. ANZ asserted throughout the period that their human rights policy was in compliance with the OECD Guidelines on Multinational Enterprises, despite updating it in 2009.

David Pred of Inclusive Development International said ANZ should explain to its shareholders why it has financed Senator Phat’s company. “This case seriously calls into question the credibility of ANZ’s due diligence process. Since ANZ does not disclose any of the corporate loans it makes, its shareholders are only left with its good word that it actually upholds the rigorous standards that it purports to apply to its corporate lending operations.”

Further, ANZ need to explain to its customers why they are playing such an active role in intensifying global inequality. It has been regularly reported on in the Cambodian press, and it is hard to believe that they have somehow just missed this.

How long has ANZ’s head office known of these human rights  abuses, and how many other ANZ-financed projects are generating abuses?

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BNZ’s 57% profit rise far from ‘broadly flat’

Despite claiming that their profits for the first quarter have so far been ‘broadly flat’, BNZ’s profits rise of $72 million (to $198 million) in the December quarter is a 57% rise on the same quarter in the previous year.

What can you do with that $198 million? It would more than cover the $185 million the Ministry of Social Development spent in 2013 on childcare assistance.

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Westpac’s 35% quarterly profit

Westpac’s profit growth of 35% simply beggars belief. The bank quarterly profit grew from $197 million in the December quarter 2012 to $266 million.

Westpac have partially attributed their success to less loan losses (in the September 2012 quarter they had greater losses than any other NZ bank).

Westpac, which is both New Zealand and Australia’s second largest bank, is currently looking to step up its operations in throughout Asia as trade relations expand.

To put things in perspective, this quarterly profit is over $40 million higher than New Zealand’s combined aid for the Cook Islands, Fiji, Kiribati, Nauru, Papua New Guinea, Samoa, Solomon Islands, Tonga, Tuvalu, Vanuatu, Tokelau, Niue, Afghanistan, Indonesia and Timor Leste for the  2013-2014 financial year (which comes to $212 million).

 

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ANZ quarterly profit up 33%

Last Friday 28 February NZ’s biggest bank ANZ reported a quarterly after tax profit of $393 million for the 3 months ending 31 December 2013. This  $97 million increase is a whopping 33% higher than the quarter ending 31 December 2012. 

December quarter net interest income grew $33 million, or 5%, to $688 million, pushing total income to $896 million. In that period gross loans grew by $1.4 billion (1.4%) to $102.25 billion.

3 months of ANZ’s profit would be enough to pay for the the unemployment benefits of 32,750 people.

 

 

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NZ credit card debt hits record high

NZ credit card debt hit an all time high of just under $6 billion in December.

Click the graph image below to link to an interactive version.

credit card debt

We’re constantly being told about how important it is for us to get out of debt. Our government is obsessed with telling us how busy they are getting out of debt (despite the massive increase in offshore borrowing since 2008). Yet we keep doing the opposite, taking on more and more debt, through homeloans, student debt, credit card debt or, for some of us, through second and third tier lenders.

Credit card debt is particularly onerous because of the high rates of interest charged, commonly just below 20% (the end-of-moth simple average standard card interest rate for December 2013 was 19.6%). Yet credit card debt is currently only a fraction of what banks would like to be charging us – according to RBNZ data total NZ credit limits were $19,769 million, meaning only a credit utilisation ratio of 0.3.

So how hard is it to get out of credit card debt? Since banks set their minimum payments only just higher than their interest rates, it can take a very long time to get out of debt. For example a $2000 debt with an ANZ Mastercard Standard at an interest rate of 19.95% paid off at the minimum rate will take 724 months, or 60.3 years to pay off. Over those 60.3 years you will pay $10,910, meaning the bank will make almost $9000 in interest charges off you in that period. See the excellent ‘Credit Card Calculator’ at Interest.co.nz for more details on this.

This is absolutely outlandish, and it is no surprise that people are literally starving to pay off their debt.

And, the problem is actually getting worse. As well as having record amounts in debt, NZ banks are riding high on the interest rates they are charging on credit cards. As the graph below demonstrates, credit card interest rates are always much higher than mortgage rates. However, from the GFC in mid-2008 mortgage rates dropped quite dramatically from over 10% to around 6%, and have hovered around there ever since. Credit card rates also dropped, although not as far – from around 20% to around 18%. And they didn’t stay at 18% for long – by June 2011 they were up to 19.4%.

credit card v mortgage rates

 

Banks will defend these rates by saying that lending on credit cards is riskier because they don’t have a house as collateral as in a mortgage.

However it is also much more profitable. And NZ banks seem quite comfortable with that fact.

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Surprise surprise… record profits for ASB

ASB bank today have reported Statutory Net Profit after Taxation (NPAT) of $416 for the 6 months ending 31 December 2013, a 14% increase on the previous year. Cash NPAT was $393 million, a 12% increase on the  previous year period. Total interest income came to $1.785 million over the 6 month period at a net interest margin of 2.35%.

Chief executive Barbara Chapman – who made a cool $2.82 million last year from selling a few of her shares in ASB’s parent Commonwealth Bank of Australia (CBA) –  attributed the growth to

“an especially strong performance from ASB’s Wealth and Insurance business that saw revenue growth period-on-period of 19 per cent…”

To put things into perspective…

That’s $2,260,869.50 a day, $94,202.90 an hour, $1,570 a minute, $26.17 a second.

Even when they’re sleeping.

CBA’s NZ businesses ASB and Sovereign insurance contributed 8.3% to the group’s earnings, with their total cash profits up 14% to $A4.27 billion in the half year.

The bank also warned that it faced higher loan impairments and a margin squeeze on home loans. While this seems a pretty hollow threat considering the continuing rise in NZ house values and the genuine housing shortage, we shouldn’t underestimate the bank’s ability to find ways of increasing profits.

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The 100 wealthiest…

The 100 wealthiest...

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February 11, 2014 · 3:29 am

Household debt as a % of GDP

The below graph uses Reserve Bank of NZ data, showing the rise of household debt as a % of gross domestic product. There has been a dramatic rise of the indebtedness of kiwis over the period of this graph, and, despite a drop after the GFC, we are on the rise again.

Household debt

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