How much would you support living a normal life — paying for housing, food, insurance and other current expenses — if you lost your main source of income today? How much would you last without having to resort to a loan, without selling your house or moving to a cheaper one?
The other coronavirus curve: is Spain prepared for a new economic crisis?
The majority of Spanish households (44%) are considered “financially secure”: they would last more than nine months with their own resources. A smaller percentage, 23%, is “vulnerable”: it would last between three and nine months. The rest are “very vulnerable”: up to 33% could not pull savings for more than three months. 9% would last less than a month and 8% less than a week.
The data comes up to the pandemic. Economists Alfonso Arellano and Noelia Cámara, from BBVA Research, have analyzed how prepared Spanish households are for the imminent economic crisis, which is already hitting hard in the most disadvantaged neighborhoods of the country. They do so through so-called financial vulnerability, a concept that measures the capacity of individuals and households to face economic changes with their own resources.
“The idea is to put ourselves in an extreme case: you have a salary and it disappears. Yes, you can collect the ERTE. But, what level of security do you have until that income appears? What happens when there is no income alternative anywhere ? Do you have any remnants or alternative resources? “, Explains Arellano. “We pose financial vulnerability with a clear vision: how you cope with your savings and how much you endure in your current situation.”
Financial vulnerability is included in the Bank of Spain’s Survey of Financial Competencies. This survey was carried out in 2016, after the previous crisis, following the criteria of the OECD. “One of the things we learned after the 2008 crisis was that consumers had to be better known to know how to act and improve their financial situation,” continues the economist. “These surveys have shown that there is a wide margin for action in understanding economic concepts: knowing what inflation is, interest rates. It is important that people know about them.”
The Financial Competencies Survey not only measures the financial vulnerability of households. Also their degree of financial knowledge (inflation, profitability and risk, diversification, etc.) and their attitude towards saving. “The vulnerable home is associated with weak sources of income. It implies an unstable job, temporary contracts … But it is not ruled out that high-income households are vulnerable, if they spend everything they enter,” adds Arellano.
Despite this, it is the lowest incomes that declare having savings for less time: 15% of households that make less than 14,500 euros a year would not last a week, compared to 1% of those who make more than 44,500 euros.
José Ramón Zagalaz, associate professor of Economics at the Universidad de las Palmas de Gran Canaria, used the ECC data in his thesis. “38% of households do not plan their finances, which is very serious from my point of view. 27% could not cover their expenses for the last twelve months with their income,” he says. “Financial fragility comes from the dissonance between the perception of financial knowledge and reality: some people think that they have above-average financial knowledge and then they see that they do not.”
Most European countries updated their survey data in 2017, so they are in the aggregate report published by the European Central Bank in March this year. The data for Spain there is still preliminary. So our country does not appear in an analysis on the subject carried out last May in VoxEU.org, the publication of the Center for Research in Economics and Politics.
The study concludes that 25% of Europeans could not last more than two months with their savings alone. By country, only Germany, France, Italy, Belgium, Luxembourg, the Netherlands, Austria and Malta are below that 25%. Finland, Poland, Portugal, Ireland, Slovakia … are above. In Latvia and Hungary they take La Palma: about 70% of their homes could not last more than two months.
The coronavirus will polarize society
Financial vulnerability has a lot to do with what one is able to save: more savings, more cushion, and less vulnerability. In this sense, the coronavirus has changed the habits of part of the population, which when being put into the house has reduced their consumption and has saved more money.
Gross savings in Spain soared in the first quarter of 2020, despite the fact that confinement did not start until mid-March. You have to go back to 2009 to find such a high figure, and even then it does not reach this year’s figure. In general, households save when they understand that the economic situation is going to get worse. “When you see the wave approaching, you look for an alternative,” says Arellano. “If you have the ability to react, phenomenal: I have not saved, but in a few months I can accumulate what can happen. But there are people who do not have that possibility.”
According to a European survey carried out in May by the ING bank, 30% of households have saved more due to the coronavirus. In Spain, the figure rises to 33%. The problem lies in the gap to save between those who already have savings and those who do not. According to the bank data, 29% of people who had less than a month of salary saved were unable to save, compared to 11% of those with more than a year of accumulated salary.
Economists believe that the pandemic will create even more inequalities. “It will polarize society. One of the causes of financial vulnerability is that you have an income shock: that you lose your job, you have a health problem. Being in an ERTE makes you more vulnerable. saved, “considers Zagalaz. “But families who have cut their income, or who have lost a job and are slow to find one with the same salary level, will be more fragile.”
“The pandemic has made everything more extreme. Whoever has been lucky enough to keep his job and income level can retract consumption because the situation is complicated. He is not vulnerable. The problem would be people who have lost income and cannot go down plus the level of consumption, “concludes Arellano. Hence the importance of vulnerability: if you are not very vulnerable, if you have financial security, you can organize in the long term, reconvert and move to another sector. What happens to those who cannot think for more than a month? they will have a difficult exit “.