The latest Financial Stability Report, published in May 2022, includes simulations of the impact on institutions of a scenario in which some of the current risks materialise. Specifically, the scenario assumed additional energy price increases and more persistent bottlenecks in global trade, generating fresh upturns in inflation and a further tightening of monetary policy, alongside a deterioration in agents’ confidence and greater risk aversion. These were very severe stressed scenarios, since they entailed cumulative deviations from the baseline GDP growth in 2022 and 2023 of between 2.8% and 5.4%. The results show that the sum of the different transmission channels in these stressed scenarios would generate a negative impact on bank solvency of between 1.8 pp and 3 pp for Spanish banks as a whole. By component, while net interest income would increase, the worsening of the credit quality of loans to the private sector would lead to greater losses. 5  Moreover, the simulated interest rate hike entails a slight reduction in the value of bond holdings on banks’ balance sheets. There is nonetheless some heterogeneity across banks, owing to differences in factors such as the weight of short-term and/or variable-rate lending, the accounting classification of debt securities, their international presence or the extent of their lending under the ICO programme.
Nonetheless, the most recent data could suggest a change in trend in this market stemming from the macro-financial setting that I have described. Specifically, housing transactions contracted in July, which is significant given that this month usually has a positive seasonal component. Also, house prices ceased to accelerate in Q2, posting growth similar to the first three months of the year. In any event, we will have to wait for new information to assess this behaviour more accurately, meaning we will need to keep a close eye on this market. As for the public sector, fiscal policy has clearly played a key role since the outset of the pandemic to soften its impact on household and corporate income, thus avoiding more persistent negative effects. The corollary of this has been a significant increase in public debt relative to GDP, which was already high before the pandemic. This high government indebtedness and the likewise high structural budget deficit evidently represent vulnerabilities when faced with a tightening of financing conditions, as is the case at present, and reduce fiscal policy headroom to respond to future shocks. Mitigating factors include most notably the higher-than-initially-forecast reduction in public deficit in 2022 and the significant lengthening of the average government debt maturity in Spain, which stands at more than eight years and delays the impact of interest rate increases on the public debt burden. In any event, Spain’s annual public sector financing requirements stand at high levels, around 20 pp of GDP.