Michael Harrison's Outlook: Can't pay, won't pay? Just take the IVA way

A bid for Barclays?; Check out of B&B
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Is a nation of shopkeepers turning into a nation of bankrupts? And, if so, who is to blame? Personal insolvencies are at their highest since records began whilst household debt now stands at more than £1 trillion.

It seems reasonable to suppose there is a link between the two. The more people borrow, the deeper they go into debt and the more likely they are to succumb.

But the rise in bankruptcies may also be linked to the perception that it has become an easier way of escaping indebtedness with less of the stigma that was once attached. The Government has made it possible for "honourable" bankrupts to be discharged in one year rather than three and the rise in insolvencies since April coincides with the change in the law.

But the new legislation is a double-edged sword. Whether discharged in three years or one, a bankrupt will still be credit blacklisted for six years and so find it virtually impossible to get a mortgage.

Even after discharge, a bankrupt is still at risk of losing their house, which seems a high price to pay in return for being allowed to become a company director once again, stand for parliament or borrow more than £500 without declaring a dodgy past.

Furthermore, the new law provides for something called bankrupcty restriction orders, which weren't there before and can last 15 years for those judged to have borrowed their way into bankruptcy extravagantly or recklessly. So, in some ways the new law is not the soft option it is depicted as.

The raw bankruptcy figures also lump together two very different categories - those who have actually been declared bankrupt and those who have opted for an individual voluntary arrangement (IVA) with their creditors.

Four in five bankrupts have no assets and never pay back anything to their creditors - more often than not they are young people still living at home with the parents. Those who go down the IVA route, on the other hand, are usually in employment and, on average, end up paying back 40 to 50p in the pound. They range from junior office workers whose income is simply too low to cover their minimum debt repayments to barristers who cannot pay their tax bills.

A climate of rising interest rates means that the bankruptcy figures are also likely to continue climbing. But it does not necessarily mean that the country is heading for the rocks. The number of companies going bust - perhaps a better snapshot of the health of the nation - is at its lowest in six years.

A bid for Barclays?

It is the dog days of August, the market picks up on a re-circulated rumour, gives it another spin on the roulette wheel and, before you know where you are, Barclays is about to be taken out for £45bn by a big, bad American bank. It is an open secret that Citigroup is on the prowl. It cast an eye over Abbey and came close to reaching an agreement with Deutsche Bank before talks broke down so a deal with Barclays would be a very acceptable consolation prize.

But if Citigroup is indeed about to pounce, then Barclays knows nothing about it. And if the two banks have been in discussions about a friendly approach, then Barclays would have been breaking the rules by buying back its shares in recent days.

Nor would John Varley, who takes over as chief exec in three weeks' time, have been so dogmatic in his declaration that Barclays has a future as an independent bank when it produced figures this week. In any case, having spent so long climbing to the top of the greasy pole, would he want to slide down so fast or become just another well-paid head of an American-owned outpost? Not likely.

That said, it is easy to see why Barclays might be more attractive to the Americans than, say, Abbey or indeed, Lloyds TSB.

At Barclays' current price, it would be a cheap way for Citigroup to bulk up and become a serious European bank. Apart from its UK presence, Barclays is also a decent-sized player in the Spanish market, while Citibank is one of the few foreign institutions to have a retail banking business in Germany. Citigroup would also be buying a business with a significant presence in wholesale banking in its back yard and a spread of complementary products.

And then there is Matt Barrett, the Canadian who is about to move up to the chairman's seat at Barclays. He knows the folks at Citigroup well enough. What better passage back to his native North America than an elevated position on the board of its biggest bank?

Barclays shares rose 11 per cent before ending the day a more modest 4 per cent higher. But three times the usual volume of shares were traded - which some took as the sound of the hedge funds closing out short positions ahead of a bid.

No smoke without fire? Or a classic case of the markets getting overheated in the August sunshine?

Check out of B&B

If it is time to buy into Barclays, perhaps it is also the moment to check-out of Bradford & Bingley, specialists in the buy-to-let mortgage. In an era of rising house prices and falling investment returns, bricks 'n' mortar look a better bet to a lot of people than pension funds.

But what if the housing market does begin to cool rapidly? Half of B&B's £22bn residential mortgage book consists of buy-to-let loans and a further 14 per cent is accounted for by the self-employed. In the first six months of this year an even higher 62 per cent of net new lending was to landlords rather than owner-occupiers and 24 per cent to self-employed.

Steven Crawshaw, the newish chief exec, has to believe his own propaganda that the housing market is sustainable and that we are already near the top of the interest rate cycle or his house of cards could come crashing down. The first borrowers who are likely to find themselves under water are those who need the rent to cover the mortgage.

Whilst its loan portfolio may be inherently more risky, B&B says its actual lending policies are among the most conservative. Across the book, loan to value is 46 per cent and, even in new lending, it is only 75 per cent which should provide a big enough comfort zone for all but the worst house price corrections.

Whilst the proportion of borrowers in arrears for three months or more has risen, it is still well below the industry average.

But the bull market in residential property cannot last for ever and, when it ends the appetite of those who treat housing as just another type of investment will also wane. When that happens, B&B will have to find another growth market - and quick.