Assessing the far-reaching implications of a rising Euribor
Fecha: marzo 2023
SEFO, Spanish and International Economic & Financial Outlook, V. 12 N.º 2 (March 2023)
Index
Assessing the recent evolution of euro interest rates reveals that following the significant upward shift in short-term rates since the summer of 2021, long-term rates may have already stabilised at restrictive levels. Under this scenario, as short-term rates keep increasing, longer-term rates could gradually stabilise, generating a downward sloping yield curve.
After years of US outperformance, last year marked an inflexion point in the relative performances of the European and US banks in terms of both their market values and earnings. The relative outperformance by the European banks went a long way to close the sizeable profitability and valuation gaps opened up between the two systems more than a decade ago.
Spanish banks announced record earnings growth in 2022, in tandem with the ongoing process of financial normalisation, in which interest rates increased, after years in negative territory. Despite strong performance, challenges remain, and banks must stay profitable and solvent on account of their systemic importance to a country’s business and social fabric, while pushing ahead with necessary cost-cutting and digitalisation.
Since the great recession, shadow banking has been growing worldwide, especially in the US and the Eurozone. However, monetary tightening and new capital requirements for private equity will likely slow down shadow banking growth.
The rise in Euribor has cooled the housing market –transaction volumes have slowed and the price curve is beginning to bend. While at present the situation does not seem to pose a risk of a crisis for the Spanish economy, going forward, the evolution of employment will be key, as this is the main variable underpinning households’ ability to service their debts.
The recent trends in the Spanish labour market have been seemingly positive, insofar as employment is already above pre-pandemic levels and continued to grow in 2022 despite the complex environment. Nevertheless, on the whole, Spanish labour market data remain mixed, impeding a clear picture of its possible structural changes.
Despite having one of the most advanced fiscal rule frameworks in Europe, Spain remains the OECD country where regional governments’ debt has grown the most since the Great Recession. Even in the context of more difficult financing conditions at present, it will be important to address existing challenges to the extraordinary regional financing mechanisms, while adapting the current fiscal stability framework to the new European rules.