The Bank of Spain has already calculated the effects on individuals of the current interest rate hikes. Calculations show that, for an increase of four percentage points as there has already been, the number of vulnerable households will increase by 380,000 and will go from 1.12 million to 1.5 million. The increase is 33%.
Vulnerable households, which bear a financial burden of more than 40% of income, will go from 10.4% to 14% of the total, according to the estimates offered yesterday by the Bank of Spain. There are currently 11 million households in debt, as indicated yesterday by the directors of the institution, during the presentation of the spring financial stability report.
The Bank of Spain also talks about “fragile households”, which are those who do not make ends meet because their monthly income and the money in their bank accounts are insufficient to cover their main expenses. They don’t have enough to pay for food, electricity, water or telephone.
These households were 3.54% of the total at the end of last year and the good news is that, thanks to wage revisions, they will decrease slightly to 3.29% in 2025. However, the poverty hits the weakest, as this percentage will rise from 13.7% to 17.5% among households with the greatest financial burden, due precisely to the rise in interest rates.
To contain the effects of Euribor increases on households, at the end of last year the Government agreed with the banks to extend the code of good practices and help a greater number of mortgagees. When the measures began to be applied in January, the Minister of Economy, Nadia Calviño, put the number of potential beneficiaries at one million households, but yesterday the Director General of Financial Stability of the Bank of Spain, Ãngel Estrada, lowered the figure to 550,000.
The Bank of Spain’s forecast is that, in the current scenario of rate hikes, 193,000 customers will take advantage of the aid, which includes grace periods and possible restructuring. The mortgage debt of these households amounts to 16,400 million euros.
For this institution, the modification of the contractual conditions of the mortgages does not have to cause a reclassification of the loans. On the contrary, it can serve banks to avoid further impairments and reclassifications.
The Bank of Spain report also mentions inflation and its second-round effects as one of the main risks at the moment. Price increases already took 4.4% of household income last year, with the impact distributed very heterogeneously.
Despite the pressure on indebted households, the economy is improving. The first quarter of this year, the report indicates, has been marked by an improvement in economic prospects and a moderation of inflation due to the containment of energy costs. However, clouds have appeared, such as the banking crisis caused by Credit Suisse or the decision by OPEC countries to reduce oil production.
The “high underlying 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”, Estrada indicated yesterday.
The report also issues a warning against indiscriminate tax cuts. The tax reliefs, says the Bank of Spain, could intensify second-round inflation, so if they are applied, they must be “temporary, focused on the most vulnerable groups and compatible with efficiency in consumption decisions, in particular energyâ€.
Generalized tax cuts, he says, “could fuel inflationary dynamics, as well as require a more vigorous reaction from monetary policy that would increase financing costs for households and businesses, and put pressure on their ability to pay.”
Far from lowering taxes, the Bank of Spain suggests that the time for the opposite is approaching. In 2024, the country must 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”.
