Egg Card Cracked by Credit Crunch as Customers Scramble for Cover

By: Nadeem_Walayat

Egg bank took drastic action to limit its risk of exposure to potential bad debt defaults amongst its credit card holders by banning 160,000 of its customers from being able to use their credit cards for new transactions leaving cards open only for repayment of outstanding balances. Angry customers responded with tens of thousands of internet posts stating messages that they tended to clear their balances on time. The 160,000 banned amounts to 7% of the Egg credit card customer base.

Eggs action can be interpreted as due to three factors -

1.Limiting risk in advance of sharp slowdown of the UK economy which will hit the unsecured debt market hard.

2. The tight money market credit conditions which have made financing of customer credit lines increasingly difficult as sources of cheap credit such as the yen carry trade unravel, and commercial banks become reluctant to increase risks by lending to other banks.

3. The Egg Bank facing financial pressure is no longer willing to carry customers that clear their balance in full each month and therefore do not generate any interest payment earnings for the bank.

Therefore Egg are seeking to reduce their customer base both in terms of retaining those customers that are most profitable and those that are least likely to default so as to maximize earnings. This could also be as a prelude to a cost cutting exercise so as the bank can reduce its staffing and running costs.

The Credit crunch crisis was sparked by the collapse of the US sub prime mortgage market, the consequences of which impacted upon the inter bank lending market which started to freeze way back in July 07. At the time I wrote the article Hedge Fund Sub prime Credit Crunch to Impact Interest Rates , which mapped out the likely outcome of an unraveling of the credit bubble due to the unwinding of the yen carry trade and the fractional reserve banking working in reverse which resulted in the banks unprepared to lend to one another in the face of increased risks of default. On top of this we had the impact on the near collapse of the collatorised debt market and now the monoline insurers that guarantee some $600 billion of bonds coming under pressure as their stock prices collapse by as much as 90%.

I specifically warned of the credit crunch spreading to credit card providers on 11th of November 2007, Credit Cards - The Next Credit Crunch?, as at the time credit card companies tightened lending requirements to new customers that resulted in 55% of applications being rejected.

Therefore the Egg announcement is just the latest instance of the unwinding of the credit bubble that has built up over the last 17+ years.

By Nadeem Walayat

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