Recession risk as British bills come due:James Saft

(James Saft is a Reuters columnist. The opinions expressed are his own.)

By James Saft

LONDON (Reuters) - The chances of a British recession are rising, as the bills come due after a decade of dependence on debt, a housing bubble and financial services.

Many of the excesses of the debt boom in Britain have been on par with, or even worse than, those in the United States, notably higher levels of consumer debt and house prices that are even more out of proportion with earnings.

And, when compared to the U.S., Britain can expect less support from either falling interest rates or increased government spending.

The upshot is a sizeable risk of a recession, the first since the early 1990s, and further troubles for the British banking sector and stock market.

Britain's economy has had an extraordinary run. Growth has been strong and stable, inflation low and controlled.

But that very stability has encouraged a borrowing binge that has juiced economic performance, taking the ratio of debt to disposable income to 173 percent and nearly tripling house prices.

"We've been on a borrowing spree," said Ross Walker, UK economist at Royal Bank of Scotland in London.

"It's not been an investment-led productivity project, it's been a consumption boom. The idea that ploughing ever more money into the housing stock is raising the productive capacity of the system is just a joke."

Credit conditions have abruptly tightened across the economy.

The same seizing up of global credit markets that pushed Northern Rock into seeking government support also shuttered the securitization market on which Britain depends for a sizeable portion of its borrowing needs.

Estimates very, but about 20-25 percent of all UK home loans were funded through the international securitization market in 2006.

That gap is unlikely to be met by Britain's bank deposit base, which because of a low savings rate is small in proportion to the amounts that consumers have been accustomed to borrowing. Alan Cleary, of specialist mortgage lender Edeus, estimates the shortfall at about 50 billion sterling annually of loans that will now not be made.

Loan approvals are off considerably and house prices are already beginning to weaken. Corporate credit terms and conditions are also significantly tougher, according to the Bank of England's credit conditions survey.

And financial services, which has been a huge contributor to growth, looks very likely to be smaller and employ fewer people in 2008.