Once thrifty Czechs discover ups and downs of debt
A subway train arrives into Staromestska station on the B line subway in Prague, Czech Republic on November 09, 2012. Gone are the days of penny-pinching: the once thrifty Czechs are on a borrowing spree whose ugly side is increasingly showing itself at a time of recession.
During the command-economy era of 1948-1989, when former Czechoslovakia was governed by a totalitarian Communist regime, lending was tightly restricted and consumers were taught to save first.
Then the switch to a market economy brought new charms, with cheap loans coupled with massive advertising fuelling a binge on imported western goods.
But coupled with negligible financial literacy, it also brought trouble.
"People have learnt to take out loans to buy everything: Christmas presents, holidays," said Tomas Vrana, lawyer and founder of one of the Czech Republic's largest bailiff services.
"When we were young and wanted to go on holiday, we either saved or went to a Czech resort. But now people take out a loan and go to the Maldives without realising how much they can lose," he told AFP.
Double-digit lending rates made loans unattractive for borrowers until 1998, when the central bank slashed its key rate to below the psychological level of 10 percent.
Five years later it was as low as two percent, and combined with economic growth and low unemployment, it set the scene for a borrowing boom.
In 2003, total Czech household debt stood at 195.7 billion koruna (around 8 billion euros, $10 billion), up from 84.5 billion in 1993.
By 2012, it had soared to 1.37 trillion koruna, or roughly one-third of gross domestic product, as Czechs bought houses, cars and consumer goods.
The EU member of 10.5 million people saw more than a quarter of its residents -- 2.9 million people -- borrow last year, according to official data.
"The Czech economy increasingly uses debt and approaches western European countries in this respect," said David Marek, chief analyst at the Prague-based investment bank Patria Finance.
"But household debt compared to income in the Czech Republic reaches only about half the amount in western Europe," he told AFP.
Yet even that borrowing percentage is turning out to be toxic, with the country locked in recession for a year now and unemployment rising steadily since last June to near record-high levels.
"The probability that a new client will now get in trouble is higher than last year," said Radek Zenka, consumer loans manager at GE Money bank.
-- 'People don't realise they should stop' --
Heavily dependent on car production and exports, the Czech economy contracted by 1.3 percent last year amid headwinds from the crisis-hit eurozone and thinning household consumption.
The central bank expects business activity to pick up by around 2.1 percent in 2014, but not before the economy contracts by 0.3 percent this year.
"Borrowers today are more often people who struggle to get by, and they get in trouble more easily," said Pavel Mertlik, analyst and former leftist finance minister.
The default rate on consumer loans topped 10 percent last year, forcing cautious lenders to hike the cost of credit.
The average commercial rate climbed to over 15 percent -- while the central bank's key lending rate stands at a record-low 0.05 percent.
Signs advertising debt collection services have become a common sight -- hanging down building facades and protruding from fields by the roadside -- reminding carefree borrowers that they are courting disaster.
"People don't realise they should stop. So they take out a loan, then take out another to cover the first one. Then a huge vortex opens up and swallows everything," Vrana said.
His firm's logo Exekuce.cz is based on the word for "property seizure" -- a term that increasingly provokes anxiety among Czechs.
When the firm began plastering its logo on the football jerseys of Czech top-flight side Sigma Olomouc, which it sponsors, fans were not amused.
They were at the game to unwind and have fun -- not get jolted back to reality with a reminder of their money woes.
"They used to grumble, there was some silly talk," said Vrana, adding that they got used to it over five seasons.
"Now they even make fun of it."