What the International Finance Institute (IFF) says in its report – How the “reversal” of the ESF’s inflation policy can worsen the economic situation
Front cliff and back stream … prove the measures he has decided to take the European Central Bank to tackle inflation unprecedented in European Union data. The International Finance Institute (IIF) has issued a warning, pointing to the threat of a new debt crisis, due to rising interest rates and normalization measures decided by the ECB. The report emphasizes that the shift in policy of the European Central Bank has led to a steady increase in the spreads of the region, putting particular pressure on economies in the South and especially in Greece and Italy.
As the IIF report points out, if the ECB’s measures provoke a new debt crisis, it will be impossible to normalize monetary policy. Therefore, the ECB will have to find a solution and balance a permanent framework to support the economies, without having at its disposal the “tool” of direct financing of a country, as the program can be legally challenged.
In an extreme case, if it sets a maximum allowable limit for spreads, the ECB will essentially commit to buying potentially unlimited bonds in the region if growth slows or deficits widen. Such a commitment is unthinkable, especially as QE financed – indirectly – most of the deficits in Italy and Spain after the pandemic broke out, the institute’s economists note. In their view, the real challenge for the ECB is the opposite: How will the peripheral countries become independent of QE.
What does the increase in interest rates mean for loans and banks?
Yesterday’s decisions of the Governing Council of the ECB point to a faster rate of reduction of interest rates than previously anticipated. According to estimates, the 3-month euribor, which is the basis for pricing all loans with floating interest rates, will be led to 1.15% by the end of December from -0.3% today, according to the report of moneyreview.gr.
This perspective permanently closes a ten-year policy of low interest rates, which in fact had “turned” to negative ground in the last seven consecutive years and specifically since April 2015, creating a safe net during the years of crisis in our country.
The loans that will be automatically re-priced are estimated to exceed 150 billion euros, raising the additional interest that companies and households will have to pay from the interest rate increases that the ECB will make by the end of 2023 over 1 billion euros. This provision concerns the total private debt, ie both the debts owed by businesses and households to the banks, which are overwhelmingly up to date, as well as the loans that are in the funds’ portfolios and which are either regulated. or in arrears, intensifying pressures on those who have hitherto been meeting their debt obligations with difficulty.
On the banks side, raising the key interest rate of the ECB by 100-150 basis points will bring additional profits of more than about 1 billion euros from interest income. This is the net benefit that will result from the overall revaluation of both the loan portfolio and the deposits, the interest rates of which will also increase, but not in a geometric way, as will happen in the claims part, which includes the vast majority of loans related to the 3-month euribor. According to the announcements of the banks, the deposit interest rates will remain almost unaffected by the increase of the key interest rate up to 0.5% and will start to rise above this level, thus expanding the spreads of Greek banks, ie the ” balance sheet »interest rates on loans and deposits.
Fixed interest rates
The fixed interest rates offered by banks – some of which have already made small changes to their tariffs – will also rise, finding that current levels of very low interest rates are unsustainable. Based on data from banks, the average fixed interest rate for a 10-year period is close to 3% and that of a 20-year period at 3.5%, but as bank executives at this level explain, the bank hardly covers its costs. According to the mortgage authorities, the current fixed interest rates are a window of opportunity for those who want to lock their mortgage installment at extremely low levels for a long time.
The conversion of the interest rate from floating to fixed is without penalty, but it is charged with envelope costs up to 200 euros and in order to decide whether to change the interest rate from floating to fixed, one must take into account when the contract was signed and the whether it is close to the end of the interest-bearing period, ie the time when the loan installment is mainly interest and not capital.
The dose
For a mortgage loan of 100,000 euros, the calculation based on an average interest rate of 3%, raises the charge due to the increase of euribor by 0.50%, to 25 euros per month if the duration of the loan is e.g. 20 years, adjusting the installment from 565 euros to 590 euros per month. The charge for the same loan will be doubled when the increase of the euribor reaches 1 unit, raising the loan installment from 565 euros to 615 euros for the same loan term, ie 20 years.
The final monthly charge is a function of the duration and “age” of the loan. So given that several mortgages have been contracted before the previous financial crisis and now the repayment period has shrunk e.g. at 10, the charge may turn out to be lower as the old period loans have covered the interest period and now the borrower is repaying mainly principal. It should be clarified that in all mortgages e.g. with a duration of 20 years, the first decade is a period in which the borrower pays mainly interest and the repayment of capital is mainly in the second decade, with emphasis on the last five years, where interest represents 10% -15% of the debt. Given that the majority of mortgage loans in our country are contracts from 2000 to 2010, this mechanism is a safeguard, at least for loans in this category and if the borrowers have not renegotiated their contracts, extending the duration of the loan for longer periods of time, e.g. 35 or even 40 years.
However, the same does not apply to business loans, especially to small and medium-sized enterprises, which are either recycled loans or working capital, and which are not contracts of the distant past. Based on the calculation for a contract loan of 200,000 euros with a 10-year term, with an interest rate of 5.5%, the increase of euribor by 0.50 will lead to an increase of the installment by 50 euros up to 102 euros if the interest rate increase reaches 1 unit, raising the installment for a medium-sized enterprise from 2,235 euros to 2,337 euros.
