• Businesses not dealing with fundamental problems because of cheap debt

• Interest rates rise will see end to ‘phony war

Responding to figures published today revealing a fall in insolvencies, Moore Stephens, the Top 10 accountancy firm, says that a recent rise in unsecured borrowing by consumers could be storing up problems for when interest rates rise.

Moore Stephens points out that consumer credit card debt and borrowing through unsecured loans has risen by £6.6bn to its current level of £162.6bn from a low of £156bn in November 2012.

Steve Ramsbottom, Partner at Moore Stephens, comments: “The days of the UK consumer de-risking their finances are definitely over.

“The current downward trend in insolvencies will come to an abrupt end when interest rates start to rise again.”

Recently published minutes reveal that two members of the Bank of England Monetary Policy Committee voted to raise rates in October’s meeting, leading the financial markets to price in a rate rise for mid-2015.

Graph up trend (PD)Adds Steve Ramsbottom: “Low interest rates combined with the improved economic outlook has led to increased consumer spending on credit cards and unsecured loans. Mortgage debt has been rising for some time but the increase in unsecured debt is new.

“When interest rates rise, a lot of people could be left shouldering debts they can no longer afford and we could see a fresh wave of personal insolvencies.”

Moore Stephens says that the fall in corporate insolvencies could be reversed when interest rates rise.

Steve Ramsbottom continues: “Cheap credit means that business directors have been able to avoid dealing with fundamental problems affecting their businesses. But when the phoney war ends and interest rates eventually rise, those problems will be exposed and failure rates will start to rise again. The interesting thing will be whether this translates into an upturn in formal insolvencies, as much will depend upon the reaction of lenders and HMRC towards default, which is hard to predict at this point.”

Moore Stephens point out that company liquidation rates are now at the lowest level on record – just 0.54% of all companies went into liquidation in the last year (year end Q3). Records on liquidation rates start in 1983.

The liquidation rate peaked during the last recession at 0.9% in the year to Dec 2009.

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