The Bank of Spain calculates that the interest rate increases of four percentage points, already largely applied by the ECB, will increase the number of vulnerable households by 380,000, which are those with a financial burden of more than 40% of their income. They will go from 10.4% to 14% of the total, according to the directors of the institution.
There are currently 11 million households in debt, of which 1.12 million are in a situation of vulnerability. The figure will now rise to 1.5 million, or 33% more. With respect to the price of money a year ago, from negative 0.15%, the ECB's increases are already equivalent to 3.65%, and the Bank of Spain's calculation refers to a 4% increase.
In its spring financial stability report, the institution also speaks of "fragile households," which are those with insufficient monthly income and money in bank accounts to cover major expenses in a month. They do not have enough to pay for food, electricity, water or telephone service, for at least a month.
The report shows that "fragile households" were 13.7% of those facing a high financial burden at the end of 2022, compared to 12.6% a year earlier. This increase responds to the increase in Euribor from April of last year, and the forecast is that it will increase. In 2025, and according to the estimates of inflation and rate increases, the percentage will reach 17.5%.
Despite the growing stress on the most indebted people, the general picture is not so bad in society as a whole. The "fragile homes" will go down and will go from 3.31% in June 2021 and from 3.54% at the end of 2022 to 3.29% in 2025. Inflation and the Euribor play against this statistic , but the Bank of Spain considers that the effect of wage increases and other income will soften the blow.
Regarding the extension of the code of good practices agreed between the Government and the banks at the end of last year, the general director of Financial Stability of the Bank of Spain, Ángel Estrada, calculates that, for an increase of four percentage points of the Euribor, they could benefit from 550,000 people. The 2012 code, in this scenario, would welcome 200,000 people.
These figures are much lower than the million people the Government is talking about. The Bank of Spain says that the 550,000 and the 200,000 mortgaged from the two codes cannot be added because, in some cases, there may be homes that fall into both categories.
The fragility of households barely increased by 0.23 basis points in 2022 due to the increases in the Euribor, due to the lag in the increases in the mortgage payment. However, after a certain threshold of Euribor increases, the tension can accelerate, warns the bank.
The report also calculates that inflation has taken 4.4% of household income in 2022 and warns of the high heterogeneity in the way in which the pressure reaches households. He acknowledges the difficulty of investigating this aspect, at a time also marked by "extraordinary uncertainty" in the economy.
The Bank of Spain is in favor of banks, "given the increase in financial pressure on households", accepting "the modification of the contractual conditions of their debt to facilitate their service, particularly for those in a situation more vulnerable."
The first quarter of the year has been marked by an improvement in the economic outlook and a moderation of inflation due to the containment of energy costs, but new elements of uncertainty have appeared, among them the banking crisis caused by Credit Suisse or the decision of OPEC countries to reduce oil production.
The "high subjacent inflation" and "a greater tightening of financial conditions" are the two aspects that can cause "an increase in the degree of vulnerability of households and companies," says Estrada.
The manager warns of the effects of the second round of inflation, especially in wages and business margins, which are added to the rise in interest rates. The result is that "the percentage of vulnerable businesses and households is increasing," he says.
Tax relief to improve the income of individuals does not excite the Bank of Spain when they are carried out in a general way. They could intensify second-round inflation, which is why he calls for them to be "temporary, focused on the most vulnerable groups and compatible with efficient consumption decisions, particularly energy."
Indiscriminate tax cuts, he says, "could feed inflation dynamics, as well as require a more vigorous reaction from monetary policy, which would increase financing costs for households and companies, putting pressure on their ability to pay."
Far from tax cuts, the Bank of Spain suggests that the time for the opposite is approaching. In 2024, the country should once again meet the deficit criteria and prepare to return European funds, as well as "improve the margin of action of fiscal policy in the face of future actions." In short, "a process of fiscal consolidation must begin," he says.
It also assumes a higher cost of financing for companies "as the degree of transmission of monetary policy advances, especially if it tightens even more." Some of them, he says, may find it difficult to meet their payment needs.
Regarding the banks, he considers that their position is solid, but warns that they must "accumulate resources to absorb losses that allow them to face unexpected situations without restricting the supply of credit to solvent projects." Specifically, they must "maintain a high degree of prudence in their provisioning and capital planning policies", since "the risks are relevant".
The Bank of Spain has already observed that credit has begun to contract and has already detected a "very slight increase" in loans under special surveillance for households, says Estrada. In the case of mortgages, new valuations are falling.
It also warns of the double speed at which interest rates are being transferred to loans and deposits. While 30% of mortgages and loans already show increases, deposits register "only a certain increase". This circumstance, indicates Estrada, is due to "the amount of liquidity that there was and to the fact that it came from a situation of negative rates that had not been transferred to deposits."
The entity also detects the first "signs of imbalance" in the housing market. The purchases and sales maintain the rhythm, but the prices already "have lost dynamism" with the rises in interest rates. The ratio of house prices in relation to household income is at "relatively high" levels and the market shows "some signs of overvaluation".
"Everything points to the fact that if there is less demand for housing, the pressure on prices will drop and it will be necessary to see if the overvaluations are corrected," says Estrada. "The forecast is for a soft landing," she adds.
