The bank monitors 94,000 million in loans at risk of becoming delinquent
Pablo Hernández de Cos, Governor of the Bank of Spain. /
The Bank of Spain asks the sector to exercise extreme caution in the face of the combination of high inflation and the rise in interest rates "which could reduce the ability to pay" of households and companies
Inflation and the war in Ukraine, added to the last throes of the pandemic, have become the main risk for the economy in the medium term. This has been highlighted once again by the Bank of Spain in its Spring Financial Stability Report, in which the institution warns that the damage caused by rising prices to household and business income, combined with a foreseeable increase in interest rates by the ECB, "could reduce the payment capacity of these agents."
Faced with this situation, the agency has once again put pressure on banks to be extremely cautious when releasing the provisions with which they faced the pandemic. "The problem is the great uncertainty that we face," explained Ángel Estrada, General Director of Financial Stability, Regulation and Resolution of the body, during the presentation of the document.
Although delinquency has been kept under control until now, thanks above all to the safety net woven by the Government during the crisis, the Bank of Spain has been monitoring the behavior of certain sectors before the end of aid and, above all, of the deficiencies approved for credits guaranteed by the Official Credit Institute (ICO).
According to the data handled by the institution, the bank currently maintains 49,000 million euros in doubtful loans in the private sector, another 27,000 million in non-financial companies and another 22,000 in households.
In special surveillance (loans that have not been defaulted but that show the first symptoms of it), there are already 94,000 million euros in total, of which 31,000 million belong to the household segment. And in the case of ICO loans, a segment that the Bank of Spain monitors with special interest, there are already 3,000 million euros in doubtful and 17,900 million in special surveillance.
As a whole, loans under special surveillance are increasing at rates of around 15%, while growth is also notable in refinancing, where "a good part of them are loans classified as doubtful loans."
The Bank of Spain observes, again, that they are the sectors most affected by the pandemic, and also something in consumer loans, where the greatest risks are found. Specifically, they point to transport, restaurants, hotels, construction or agriculture. "Households with employment linked to these sectors and those with low income are also subject to special surveillance," indicates Estrada.
Uncertainty
In the document made public this Wednesday, the body commanded by Pablo Hernández de Cos also warns of the vulnerability that the high public debt implies for the Spanish economy. Especially given the process of normalizing monetary policy, which has already generated an increase of more than 150 basis points in the 10-year interest rates of new Spanish public debt issues since January 2021.
It is true that the average costs of debt have fallen in recent years, as the debt that is currently maturing was issued at higher interest rates. But the current high levels of deficit and debt "make the Spanish economy vulnerable to deterioration in financing conditions and limits the fiscal space to react to the materialization of new risks."
Under this scenario, the Bank of Spain insists on the urgency of a medium-term fiscal consolidation program “for its application once the recovery is solid”. And it does so just a few days before the Government maintains the update of the Stability Plan to Brussels, whose term ends on April 30, and where a downward revision of growth estimates is expected, which until now remained in 7% for this year.
public accounts
In its latest forecasts for the Spanish economy, the Bank of Spain already pointed to a moderation to 4.5% in 2022, "mainly due to the impact on private consumption of the persistence of inflation at high levels, which has been aggravated by the war in the Ukraine. The problem, as the Stability Report points out, is that the persistence of high inflation "is eroding the income of families and reducing the dynamism of the recovery of their consumption."
So if the impact of the rise in energy ends up being fully transferred to final prices, "the higher wage demands could trigger second-round effects of considerable intensity, which would translate into a more pronounced and prolonged inflationary upswing than anticipated so far," the document states. "This would mean a greater erosion of real household income, which would end up weighing down their consumption, and the demand for investment and employment by companies," they insist.
