Uncertainty is on the rise: the war in Ukraine has no end in sight and the energy crisis shows little sign of improvement. The Bank of Spain insists on calling for caution and warns that the volume of doubtful loans or those under special surveillance continues to rise, although the entities insist that they see no signs of alarm about the default. At least for now, in part thanks to the support offered by loans guaranteed by the Official Credit Institute (ICO). Precisely on this, the supervisor has worsened its situation again and raises those classified as doubtful or under special surveillance to 23,000 million.
“In the case of loans guaranteed by the State through the ICO, a certain deterioration in their credit quality has been observed in recent quarters. The credit guaranteed through the ICO classified under special surveillance reached 22.7% in March 2022, which represents an increase of 6.4 percentage points compared to June 2021. For its part, the proportion of doubtful loans reached 4.1% (2 percentage points more than in June 2021). In addition, it must be taken into account that a significant part of these loans still enjoys a grace period, which will end around the summer of this year”, the governor of the bank, Pablo Hernández de Cos, said this Friday in Santander. This means that there are 19,500 million under special surveillance and 3,500 million as doubtful.
This is another factor that contributes to the unflattering forecasts for next autumn, since it will be in the final part of the year when defaults on these loans that are still within the grace period surface. It is taken for granted that summer will be months of prosperity: after more than two years of the pandemic, now that there are almost no restrictions, consumption is skyrocketing and the desire to travel is felt in the first occupancy figures. However, for the beginning of the fourth quarter the estimates become less positive.
On the other hand, the supervisor estimates that a quarter of the loans granted to companies in the sectors most vulnerable to the pandemic and the energy crisis are at risk of default (almost 21.5 billion). These activities focus on hotels and restaurants, oil refining, social services and leisure, transport and storage, and the manufacture of transport equipment.
According to the bank’s classification, a doubtful loan is one in which there has been a non-payment of the principal or interest for a period of more than 90 days or when it is considered unlikely that the debtor will fully comply with its obligations, although there are still no unpaid amounts. . On the other hand, those subject to special surveillance are those in which a significant increase in credit risk has already been observed from the time of granting, despite the fact that no default has yet been recorded. This explains the Bank of Spain’s insistence on messages of caution to the banking sector, although the entities say that there are still no worrying signs. “The supervisor, by definition, has to err on the side of caution”, stated Hernández de Cos during his participation in the seminar organized by the Association of Economic Information Journalists (APIE) at the Menéndez Pelayo International University (UIMP).
The types, something above 1%
The governor has also argued that the announced rise in interest rates by the ECB should be maintained at close to 1%, although he has clarified that the so-called neutral rate will vary depending on the data available at any given time. “With the information we have to estimate that natural interest rate, today it would be between 1% and 1.5%”, he assured. A few days earlier, also in Santander, Luis de Guindos, vice president of the ECB, preferred not to put a ceiling on it. “If someone tells you, don’t believe it too much, because it is a matter that will depend on the evolution of inflation,” he snapped.
Hernández de Cos has clarified that they are mobile values, exposed to changes. He has argued that despite their provisional nature, they are very useful for generating expectations and explaining monetary policy. At the moment, he has said, with medium-term projections of inflation around the 2% target (the Eurobank places it at 2.1% in 2024), it allows justifying that the rates are in that range. That yes, it is a non-closed figure: “If there are changes and medium-term inflations are pointed out persistently above 2%, it could justify a change and that monetary policy becomes restrictive. And on the contrary, if there were medium-term inflation below 2%, it would not be necessary to reach that level of neutrality either and be in a slightly expansive position”.
In this way, if prices continue their upward spiral, the price of money can be above that barrier of 1% or 1.5% set by the governor. This in turn has a direct impact on the pockets of families, especially in mortgages. In Spain, most are referenced to the 12-month Euribor, which has been on the rise for months, discounting these increases.