A run on Zopa?

There is no evidence for, or imminent possibility of, a run on Zopa.

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OK, now we've got the scaremongering out of the way, let's examine the substantive issue.

From Wikipedia:

"Zopa enables investors to lend to UK consumers directly through its peer-to-peer lending platform.

"Borrowers can take out loans between £500 and £25,000. Typically individuals use these to funds to help buy a car, consolidate debts, cover home improvements or weddings. All applicants are credit-checked by Zopa.

"Investors’ money enters a queue to be lent in one of three products, which vary according to the risk, returns and accessibility they offer. Once the money reaches the front of the queue, it is split into micro-loans (typically of £10-20 each) that go to multiple borrowers. Investors then receive monthly repayments of interest and capital, which they can relend to compound the interest."

We have funds in Zopa so we have a personal interest in this issue.

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Both Steve Keen and Michael Roberts have warned about the overhang of corporate and consumer debt in the UK economy .. portending an upcoming recession. As regards consumer debt, according to This is Money,

"We know that it is largely credit cards, personal loans and car finance, but we aren't quite sure who is doing the borrowing and why – beyond the helpful statistics that debt charities can provide.

Some of this pile of credit card and personal loan debt is down to people who can't make ends meet any other way, a considerable amount is down to others who prefer to live beyond their means and borrow a better lifestyle today from their earnings tomorrow.

"The £201 billion debt pile is now within touching distance of its peak of £208 billion in September 2008 when the financial crisis was in full flow. In the crisis, as worried lenders slammed the doors after the horse had bolted - and done an entire lap of the field – consumer credit dried up and borrowing fell, down to about £160 billion in 2013 to 2014.

"Since then it has been on the rise.

"But that in itself and the absolute size of the pile is not necessarily a problem.You would expect consumer credit to rise in an economic recovery and as long as people's ability to pay back that debt is improving through rising wages, then a higher debt pile becomes an economic factor, not an issue.

"There's a problem in Britain though. Our ability to pay back debt hasn't been improving – real wages have fallen.

"Once our earnings are adjusted for inflation, we have less money to pay back our debt today than we did at the financial crisis peak. The other factor that comes into play here, of course, is interest rates. These, as you won't need to be told, are super low. If you can borrow at those low rates then the affordability of your debt is better, yet here there are also some problems. Firstly, rates will one day have to rise. ..."

A rise in interest rates and/or a pullback from QE could both reduce demand in the economy. As a recession bites, unemployment rises as businesses contract or go bust (see "Zombies hold back the recovery"). The unemployed find it hard to repay debts.

Schroders' chart shows how many months the market has expected to wait for a first
rate rise over the past year. One is now expected in about 10 months, sooner than previously.

With interest rates rising and incomes falling, many consumers will be in difficulties. Perhaps they will be unable to service their debts to credit card companies .. and to peer-to-peer lenders such as Zopa.

But events may move faster yet. Given a tired Tory government with a wafer-thin majority, a political crisis could result in a Corbyn electoral victory .. which might then trigger an economic crisis sooner than we might think.

In normal times, Zopa's bad-debt protocol and stringent credit checks mitigate the risks of default. But in a systemic crisis, the number of bad debts could spiral. This could make loan-books unsaleable for savers trying to exit before they lose the preponderance of their investments. And Zopa is not covered by the UK Government's Financial Services Compensation Scheme.

So the conclusion I draw is to keep a prudent eye on the state of the economy. If we seem poised to enter a consumer-debt-fuelled recession of any severity, I'd be thinking of exiting Zopa earlier rather than later. In the meantime we're quietly reducing our exposure.