The Bank of Spain warns that risks to the economy “still remain at high levels”


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The Bank of Spain states that the Spanish economic situation “has improved” since April, while uncertainty about the growth path of the Spanish economy in the short and medium term “has been reduced” thanks to the improvement in the health and economic situation. However, it has warned that economic evolution may be affected by various vulnerabilities and risks, which “still remain at high levels”, including an uneven recovery between sectors or a more persistent high inflation than is currently estimated. And it also warns about the financial sector: “The risks to the banking system are relevant and part of the potential latent deterioration in credit portfolios could materialize in the coming quarters.”

This is reflected in the Financial Stability Report for autumn 2021, in which he points out that the central forecasts for the Spanish economy, in the short term, include the continuation of the recovery, which is favored by the progress in the vaccination campaign, the lifting of the measures to contain the pandemic and the support of economic policies, as well as the arrival of European funds.

However, regarding the main vulnerabilities of the economy and the Spanish financial system, the report highlights the “weakness” of certain segments of businesses and households, especially, those linked to the hotel industry, tourism, transport or automobile manufacturing, which have accumulated the largest increases in bank debt and doubtful credit. In this sense, he assures that “for the moment” scenarios of significant increases in business bankruptcies seem to have been avoided, although he recalls that the extraordinary measures to support the economy “are still very important.”

It also points out how vulnerability the increase in public debt, as a consequence of the “necessary and decisive” response of economic policy during the Covid-19 pandemic. However, it highlights that, although it foresees that public debt will moderate “significantly” in the medium term, this high level of debt makes the Spanish economy vulnerable during that period to a possible economic deterioration, reducing the capacity to respond in case risks materializing. Related to this, the institution indicates that according to the simulation exercises carried out, «the debt ratio would remain around 115% of GDP over the next 15-year horizon in the absence of budgetary consolidation measures, under the assumption of that the Spanish economy maintains growth rates similar to the average of the last decades ”. A real risk of public debt becoming abnormally high if decisions are not made.

The supervisor also acknowledges that the economic improvement has resulted in a reduction in the losses expected by the banking sector, which has led to a decrease in provisions for financial impairments.

Credit impairment

The Bank of Spain also has a deterioration in the quality of outstanding loans: “Certain signs of deterioration in credit quality are observed, highlighting the increase in loans under special surveillance, and in refinancing”.

In this sense, the institution warns that loans under special surveillance, which anticipate greater probabilities of default compared to those in a normal situation, increased notably (53%) in the last twelve months. “This behavior began to register from the third quarter of last year, accelerating notably in the fourth quarter of the same and, for the moment, the interannual variation of these loans continues to increase,” the document points out, to add then that refinancing and restructuring have grown at a rate of 8.8% year-on-year.

Credits with endorsement of Official Credit Institute (ICO) now focus a good part of the gaze. There are still many in default until mid-2022, but it is already beginning to be appreciated that the problem of defaults has begun to surface. «The situation of loans with an ICO guarantee granted to non-financial companies and individual entrepreneurs shows a deterioration in June 2021 compared to December 2020. At the level of operations with an ICO guarantee, the weight of credit available under special surveillance increased by eight percentage points, standing at 16% “, the report states.

“It is also observed that the fraction of the volume of ICO operations linked to clients with a problem loan (out of the total financing available, not only ICO operations) has increased significantly for non-financial companies”, says the Bank of Spain, to add below that further impairments in ICOs are expected to materialize once the grace period expires for all loans.

Income pressure

On the risk side, the Bank of Spain affirms that if the problems in the supply chains end up weighing down global economic activity in an intense and persistent way, “This would also affect some industrial branches in a more lasting way” in Spain.

Another risk “to the downside” is the possibility that the rise in the prices of raw materials and some intermediate goods is “less temporary than is currently assumed”, which could put pressure on the income of households and companies.

“This greater persistence could lead to a pass-through of cost increases to final prices and wage demands, leading to a rebound in inflation of a more intense and lasting nature than is anticipated at this time,” the report states. .

It also identifies as a “downward” risk the spread of new variants of Covid-19 that are more resistant to vaccines, which could lead to new restrictions on mobility, as well as the risks associated with more persistent effects of the crisis on the business fabric and employment. In this regard, the General Director of Financial Stability, Regulation and Resolution of the Bank of Spain, Ángel Estrada, has indicated that China has once again decreed restrictions on mobility and activity, although he has affirmed that there the vaccination rate is “more slow”.

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