Credit card crisis next, warns RI research house, as pension fund returns bomb

France’s FRR down -11% this year as market falls hit pension assets.

A crunch in the credit card market could follow the current crisis in the mortgage sector, according to Innovest, the SRI research company that was one of the only houses to predict in print the potential blow-out in the sub-prime sector back in October 2006. A second shock could give a double whammy to already fragile banking groups with significant credit card businesses. Innovest said new credit card issuance would slow as banks rebuild their tattered balance sheets. This, it said, will make it difficult for distressed borrowers to roll bad debts into new low-interest cards. Innovest said that in the second quarter of 2008, credit card issuers in US states hit hardest by the mortgage crisis saw the sharpest spikes in credit card net ‘charge offs’ – the write-off of credit as bad debt because of non-payment. However, the research house said that the 2006 US bankruptcy reform would cause credit card charge offs to be delayed and warned that as a result the relatively low charge off rates currently recorded are the “calm before the storm”. It said delinquencies will begin to fully register as charge offs in early 2009 and anticipatesa commensurate surge in bad credit card debt: “Credit card usage has spiked because expenditure which used to be charged to home equity loans is now charged to credit cards.” The potential for a further market shock early next year on top of the current chaos could compound the misery for pension fund investors, whose returns are already being hammered. France’s pension reserve fund FRR, issued a public reassurance after its returns dropped to an estimated -11% last week from the start of the year. The fund said its average annual performance was still more than 4% despite the current setback. Last week, the $14.1bn New Zealand Superannuation Fund announced that its net return on investments for the financial year to June 30, 2008 was -4.92%, before tax. The chairman of the guardians of the NZ Super fund, David May, said: “The negative impact comes despite our lack of any significant exposure to the sub prime market, the finance company sector, or to the liquidity strains suffered by many financial institutions.”