The strength of employment is putting the Spanish economy out of danger of one of the most predictable effects of the increase in interest rates: the increase in delinquencies. According to data published yesterday by the Bank of Spain, the ratio of non-performing loans to residents fell again in March and stood at 3.51%, compared to 3.55% in February. It is consolidating at levels far removed from the forecasts that pointed to bank defaults of around 4.5% for this year. When explaining the trend, experts agree that the labor market is in good shape.
The current bank delinquency figure is the lowest in 15 years and occurs despite the fact that in July the ECB began the fastest sequence of interest rate hikes in its 25-year history. The prognosis of the official bodies and of the banks themselves was that of a rise in delinquency which for the moment does not appear, despite the fact that the vast majority of variable rate mortgages have already been reviewed.
“The key variable is employment,” says Leopoldo Torralba, senior economist at Arcano Economic Research, when he comments on what has happened with bank arrears. “The delinquency has a lot to do with it. We are recovering well and we are already better than before the pandemic because there is confidence because there is employment and savings”, he points out.
The labor market closed in April with a record 20.6 million employed, according to the latest data from the INE. 240,000 jobs were created and the unemployment rate fell by 74,000 people to its lowest level since 2008, although it remains the highest in the EU.
“The drop in arrears in families is one hundred percent due to employment,” says José Carlos DÃez, professor of Economics at the University of Alcalá. “The previous crisis showed that families stopped paying the mortgage when the unemployment benefit fell below half, and in the last year we have not had job destruction”, he says.
DÃez emphasizes another positive element: the price of housing is also not falling, which would allow a mortgagee in conflict to sell the property at a small discount and pay off the debts.
The current delinquency rate contrasts with that of 4.24% in March of last year and coincides with a sharp decline in the volume of delinquencies over the last five years. Doubtful loans now amount to 42,214 million euros, less than half of the 97,692 million in 2017, when the non-performing loan ratio was 7.79%. This scenario is the best since December 2008, when the great recession began to have an effect on family economies and in just one year the percentage shot up from 3.37% to 5.08%.
The thesis of employment as the fundamental cause of low arrears is also defended by the banks themselves. “The fundamental thing is that employment continues to grow and that unemployment is falling. The economy is strong and the prospects are improving”, say the banking entities, which in 2020 in some cases presented losses to make provisions in anticipation of an adverse scenario that has not come to pass.
Doubtful credits are those that accumulate at least three unpaid installments. Its current balance is 18% lower than it was a year ago, after falling by almost 1% between February and March. In total, the Spanish owe 1.2 trillion euros to the banks.
Households are not only resisting the blow, but have accelerated debt repayment even though their savings level has fallen. At the press conference presenting quarterly results, Santander’s CEO, Héctor Grisi, already pointed to this trend: families prefer to reduce their mortgage even before investing.
