The bank revives credit to the public sector with the biggest rebound in 10 months

Banks once again give credit strongly to Public Administrations. After a streak of seven consecutive monthly falls, Spanish financial institutions opened the tap to the Central Administration, autonomous communities and municipalities with a rebound of 3.6%, the largest monthly increase since June 2021. The resurgence of bank credit to the sector public began in March this year, just after the Russian invasion of Ukraine, to later consolidate the growing trend in April. The Spanish Public Administrations concentrate 82,316 million euros.

The rate of growth of credit to the public sector is more intense than that destined for families and companies. Private sector financing rose 0.7% in April from the previous month, to almost 1.2 trillion, according to the latest data available from the Bank of Spain, that do not take into account the resources mobilized by the Official Credit Institute (ICO) nor by the Financial Credit Establishments (EFC), which are specialized in consumer financing.

If the ICO loans are also included, which the Government reactivated with force to guarantee liquidity in the Covid era, and those of the EFC, the total financing of the system to the Public Administrations supposes more than 6%, a weight that was reached in 2021 and not seen since 2016.

Public Administrations usually resort to bank credit as part of financing their costs. In the previous economic crisis, in fact, it was a very active lever that offset the fall in tax revenue. For financial entities, credit to the Central Administration, autonomous communities and local corporations is the one that consumes the least amount of capital, due to the low risk of non-payment. But on the other side of the coin is the lower interest they usually charge, below the market price.

In any case, the increase in credit to the public sector does not raise the doubts of banking supervisors, who are concerned about the real situation of non-performing loans in banks after the war in Ukraine. The ECB fears a sudden outbreak of bank defaults after the summer, when Spanish activity may suffer sharply from the effects of the price hike, which has soared above 10% in June, the highest level since 1985.

Focus on ICO credits

The Bank of Spain has also focused on ICO credits from the Covid era. Although most of these loans have the guarantee of 80% of the State, the supervisor has detected a deterioration in their repayment quality. And it estimates that almost 23% of these loans are classified under special surveillance, that is, they are potentially at risk of default.

This week the Bank of Spain has redoubled its warning about ICOs, especially due to the risk of insolvency of the companies most affected by the Covid crisis, such as hotels and tourism companies, once the grace periods run out in the next few months.

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