Yesterday, the Bank of Spain identified geopolitics as the main risk for the financial system in view of the situation in the Middle East, Eastern Europe and Taiwan. The growing tension may cause the derailment of an economic train moving towards lower rates and the containment of inflation.
In its spring financial stability report, the Bank of Spain identifies this threat as the only one in red on its risk indicator. Persistent inflation or the weakness of economic growth no longer generate so much concern and they move to yellow.
“Military conflicts in Ukraine and the Middle East continue to be a focus of high geopolitical tension” and “constitute a source of uncertainty that is difficult to quantify”, states the report. “The markets are not discounting a major escalation, but we will have to wait,” added Ángel Estrada, Director General of Financial Stability at the Bank of Spain yesterday, during the presentation of the report.
The publication of the document coincides with this weekend’s attack by Iran on Israel, whose effects on the market were not significant. The barrel of Brent kept its price around 90 dollars per barrel. There were also no great fluctuations in the international stock markets or in the price of gold.
The report alludes to the risk of “regional extension of tensions” in the Middle East and mentions attacks on merchant ships in the Red Sea as an example of an incident capable of raising transport costs and slowing down the flow of goods . “An aggravation of the conflict cannot be ruled out”, he says. A survey carried out by the same institution in the first quarter of this year shows that 60% of companies are worried about international uncertainties.
The half-yearly report generally paints a good environment for the Spanish economy. There is no risk of a housing bubble and households have resisted interest rate rises better than the bank itself expected. A year ago, the Bank of Spain predicted that 380,000 families would become vulnerable by having to face a financial burden of more than 40% of income. The omen has not been fulfilled.
However, there are vulnerabilities, and the high public debt stands out among them all. If there are no fiscal and budgetary adjustments, the debt-to-GDP ratio will go from 108% in 2026 to 120% in 2040. The scenario is “more adverse” than what was planned in 2019, so that “it is necessary to start the 2024 a fiscal consolidation process”, he warns.
However, households are doing better than expected. Their income increased last year by 5.5% thanks mainly to salary increases. The personal debt-to-GDP ratio is 47%, the lowest level since 2002. Last year alone, they paid off the equivalent of 3% of their mortgages.
In addition, the code of good practices agreed between the Spanish Government and the banks to help mortgagees in conflict has had a “limited” effect, with 7,900 operations for 907 million euros. Barely 12% of requests materialized.
The Bank of Spain also yesterday asked banks to be “cautious” regarding the distribution of dividends. He insists that they must take advantage of the boom to capitalize.
