The strategy of the monetary authorities in Frankfurt to curb inflation and control it will end up being felt this year in the pockets of families. Especially in the case of the 11 million households that maintain debts with the banks, almost half of them with their own houses mortgaged mainly with credits linked to the Euribor.
The index that had been in a dormant state since 2014 due to being negative has woken up, climbing to above 3.6%. It will be a determining factor for the financial situation of hundreds of thousands of families to worsen in the coming months to the point of making them “vulnerable”, according to the Bank of Spain.
The average interest rate in Spain rose again in March, touching 3.67%, its highest level since February 2012. The 12-month Euribor, the main indicator of variable-rate mortgages in Spain, stood at 3.647%, compared to -0.237% at which it closed a year earlier.
There have been thirteen consecutive months of increases and the financial pressure is suffocating more and more families. Taking into account that the rise in the Euribor is far from over, the supervisory body estimates that over the next few months 379,000 families will join the list of households that need to take advantage of aid plans offered by their entities to pay the mortgage . These aids are included in the Code of Good Practices to which the banks have adhered and which they are obliged to comply with in order to help these families/clients who become vulnerable. This situation, by the way, is determined by a financial effort of 40% of the income, which is the same basis that the Bank of Spain has used to make its estimates.
The body governed by Pablo Hernández de Cos warns that, until last December, the banks had transferred only 30% of the total financial pressure resulting from the rate hikes promoted by Frankfurt to cool inflation. According to their estimates in total, throughout 2023, there will be a total of 550,000 families that need help to repay the principal plus interest to their lenders. In general, the clamp that marks the drastic increase in interest rates and the effects of inflation on households that see their purchasing power diminished, mark a context of “risk and uncertainty”.
The aid that households can take advantage of consists of a reduction in the interest rate, extension of repayment terms, grace periods, the possibility of requesting a debt relief or, as a last resort, dation in payment with a rent.
“Given the shock of interest rates since 2020, it will go from 10% of vulnerable households among those in debt to 14% with a rise of 400 basis points in the price of money,” the agency’s technicians explained yesterday.
In total, one million households with bank debts are declared vulnerable. The impact of the interest rate rise is greater the lower the income and the increase in vulnerable households would mainly come from this profile of domestic economies, although it is not just a question of poor households, but of clients who already spend more than what they earn.
Based on the experience of a Code of Good Practices that was released in 2012, the Bank of Spain considers that 550,000 households could adhere to the new code and some 220,000 to the reformulated traditional code, far from the million households estimated by the Executive last month of November.
The Ministry of the Economy, however, rejected yesterday that the million households cited last November were an inflated figure and claimed credit for having reduced it by more than half with income support measures that now exclude those households in vulnerable condition.
Since these forecasts were made «there has been a rapid drop in prices and economic growth and job creation have also accelerated and pensions, civil servant salaries, private salaries and the Minimum Interprofessional Wage have risen ( SMI), increasing the income of families and alleviating the impact of the rise in mortgages”, sources from the Economy explained to servimedia.
In any case, the financial situation described in the Bank of Spain report points to a reduction in the granting of credit by banks in addition to a “soft landing of prices” in the real estate sector. The agency rules out that entities accumulate seized apartments as in the 2008 crisis and, if anything, highlights the good health of the sector, which keeps delinquency to a minimum and raised its profits by 18%, up to 25,540 million euros. Regarding the different speed at which interest on loans and remuneration on deposits are being transferred to clients, the report highlights the liquidity available to banks and limits itself to pointing out that the rate “is lower than expected according to with historical experience. Also, it explains a good part of the results presented by the entities.
The impact of the escalation of rates is also significant on the business sector and especially on indebted companies that have seen how the increase in interest on the loans contracted eats up their profit margins. The situation has as a good indicator the credits of the Official Credit Institute (ICO) distributed by banks with the guarantee of the State. The delinquency rate has shot up to 7.5% with a total volume of doubtful loans of 6,000 million euros between defaults and significant probabilities of default.
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