Credit problems on the rise as economy goes off the boil

18 March 2008

MADRID – The latest batch of indicators released yesterday lent further weight to the argument that the Spanish economy is facing much tougher times ahead than the government initially believed.

Non-performing loans of the financial system experienced their biggest jump in January since 1994, while in the case of the country’s savings banks the bad loan ratio climbed above 1 percent of total loans for the first time in seven years.

According to figures released Monday by the Bank of Spain, the loan delinquency rate rose to 0.955 percent from 0.837 percent in December. The rate for the savings banks moved from 0.889 percent to 1.032 percent.

In the wake of the credit crunch unleashed by the US subprime crisis, the Bank of Spain has repeatedly underscored the solidity of the Spanish financial system and its ability to weather the current storm. In response to reports some of the country’s savings banks were in problems, the Bank of Spain released a statement last month saying "there was no basis for sowing seeds of unjustified doubt about the health of the sector."

This stance is borne out when Spain is compared to the rest of Europe, where the average non-performing loan ratio is around 2.5 percent. Savings banks have provisions that provide coverage of 212 percent for bad loans, compared with an average of 60 percent in the EU.

Sources in the sector said an increase in borrowers being unable to pay back loans had been on the cards in the wake of rises in European interest rates.

There was further evidence that more Spaniards are starting to feel the pinch in the shape of defaults in bills of exchange payments in January. The total number of unpaid bills climbed 3.8 percent in the first month of the year, while the total amount that remained unpaid was up 48.7 percent at EUR 1.43 billion.

The government’s official growth target for GDP growth this year remains at 3.1 percent, down from 3.8 percent in 2007, although that is likely to be revised downward. The forecasts of international bodies are much lower – 2.7 percent in the case of both the International Monetary Fund and the European Commission – while some private sector economists such as Commerzbank see growth of no more than 1.5 percent.