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Bank of Spain warns defaults for ICO balances rose 177% in 2022


The aftermath of Covid-19 is already noticeable in the corporate non-payment figures. While late payments remain low overall, credits guaranteed by the Official Credit Institute (ICO) show that paying them back is getting worse at times. Specifically, the Government-guaranteed loans Which is already 177% behind in 2022, that is, the number has almost tripled.

Doubtful assets rose 78.8% last year, which increased the proportion of doubtful assets 3.6 percentage points to 7.1%. (…). Within ICO loans rated as doubtful, delinquent loans (actually incurred in objective default) were the highest (177% in the interannual rate), while loans not in delinquency did so to a lesser degree (29.6). % inter-annual rate), reveals the Bank of Spain’s latest financial stability report. As indicated by the institution’s Directorate General for Financial Stability, Regulation and Resolution, the total volume of doubtful loans amounts to just under 6,000 million euros at the moment.

Similarly, the financial supervisor points out that the amount of secured loans decreased in 2022, which also contributed to the relative increase in doubtful assets by eight-tenths. But in any case, the institution notes, “its credit quality has worsened.” This has been talked about for several quarters now, but to date there has been such a large increase in defaults in this finance sector that was enabled during the worst of the pandemic. Something that is being closely watched given that the amount of funding in ICO credits is well over €100,000 million.

The economic situation and the risks facing the Spanish and European economies do not help to improve these data. But not just in terms of government-guaranteed loans, but also in terms of the overall financial health of businesses and families. this is the reason Bank of Spain He calls on banks, once again, to exercise caution: «The projections for the coming months must be guided by prudence. On the one hand, entities may require larger provisions for balance sheet impairment as a result of the potential for materialization of certain risks, particularly the erosion of the ability of firms and households to pay.

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However, the wisdom advocated by the Superintendent does not mean to completely cut off the credit tap and devote everything to strengthening itself, but rather urges banks to continue financing those viable projects. In this context, it is essential for banks to maintain an adequate flow of credit to them solvent projects For this, they must take into account prudent judgments and capital planning policy, which specifically allows for the possibility of allocating part of the increase in profits that occur in the short term to increase the flexibility of the sector in the face of unexpected events ». refers to the report.

pressure on families

Thus, not only the productive fabric faces uncertainty High financing costs and inflationary pressures. Families have already experienced a worsening situation. The strong increase in inflation has translated into a 4.4% decrease in real disposable household income in 2022 compared to the previous year, and the rise in interest rates reduces the spending capacity of debt-laden households and the fulfillment of their financial obligations. The document indicates that these negative effects on purchasing power will be higher in low-income debtor households.

The Bank of Spain asserts that the rise in benchmark interest rates – the main rate is already at 3.5%, when a year ago it was 0% – increases the number of vulnerable households, and goes further: “Rising consumer prices and higher interest rates would reduce already from being able to repay certain debts of the most vulnerable families.”

What can families do to avoid falling into default? The Bank of Spain offers a “solution” to those families who have seen their financial stress increase. This happens through debt refinancing, as it really does. Given the increased financial pressure on households, modifying the contractual terms of their debts to facilitate their servicing, particularly for those in a more vulnerable situation, is considered as a financial management possibility that increases the odds of recovery. lenders and mitigate the potentially negative impact of default on consumption and access to credit for households,” the Financial Stability Report highlights.

economic risks

Moreover, the Bank of Spain acknowledges that economic prospects have improved compared to a few quarters ago, when a recession was a possible scenario, but they also warn that some risks remain, such as the war in Ukraine, and turmoil. Finance and inflation…

Specifically, in terms of financial turmoil, the document indicates that what happened in March with entities such as Silicon Valley Bank or Credit Suisse is a risk for the financial sector, also because it had an impact on prices. In this sense, the report indicates that “there are greater risks on a global scale represented in the increase in financing costs and pressure on liquidity in the banking sector, which also affects Spanish entities, and may negatively lead to pressure on the favorable financial position with those that started in 2023 ». .

In terms of inflation, this continues to be a source of uncertainty and risk for the Bank of Spain. Although, in light of the report, everything indicates that the focus at the moment is more on core inflation, which is inflation that excludes energy and fresh produce. “The high level of sub-inflation that continues to be observed across multiple geographies increases the risk of second-round effects, both on wages and on labor margins. These effects would prolong and increase the dynamics of price increases, ”he asserts.

More in terms of the country, the Bank of Spain warns again of imbalances in public finances. Despite signs of containing this weakness in the short term, economic forecasts continue to project public debt in Spain to rise in the coming years. It is also estimated that the general structural deficit level is high. In addition, the continued rise in interest rates will gradually increase the average cost of debt. This budgeting assumes an element of the economy’s vulnerability in the face of changes in market sentiment and limits the available fiscal space in the face of a possible deterioration in financing conditions or a slowdown in activity,” the document notes.

In this regard, the supervisor reminds the government that it must submit to the European Commission a public accounts plan that complies with the new fiscal rules. He noted that “Spain should introduce a stabilization program this spring that leads to deficits in public administrations systematically below 3% and this reinforces the ever-declining debt trajectory.”

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