“The Credit Contraction Phenomenon: Why Spain is Suffering More than the Rest of the Eurozone”

The credit contraction phenomenon that the economy is experiencing is the consequence of two variables: a decline in demand, motivated by the increase in the price of money, and a restriction in supply, the result not only of the tightening of monetary policy, but also greater prudence when managing risk. Although it is a general trend, its pace is not homogeneous throughout Europe. The latest data from the ECB show that the drop is being especially pronounced in Spain, while the rest of the euro area is resisting the trend. Credit to Spanish households fell by 0.8% year-on-year in April, compared to the 2.5% growth registered in the euro zone as a whole, while financing to companies fell by 0.6%, a figure that contrasts with growth of 4.6% on average in the euro area. In the case of corporate financing, it is the first year-on-year decline since March 2022.

The change in European monetary policy initiated last year by the ECB, and the successive rises in interest rates that have resulted, put an end to the era of cheap credit and easy financing from one day to the next, at the same time that it opened a stage of more austerity, greater demands in terms of credit risk and much more severe contractual conditions. This change, which has resulted in a progressive closing of the credit faucet in financial institutions, has not only been a consequence of monetary policy and economic uncertainty, but also of a regulation that obliges banks to manage credit responsibly, which implies carrying out an in-depth assessment of the solvency of the clients to ensure that they will be able to afford the payment of the installments throughout the life of the loan.

Added to this scenario is the regional banking crisis in the US and the fall of Credit Suisse in Europe, which have sent an unequivocal message to the sector, and which explains why the pace at which banks are tightening credit is the fastest since the sovereign debt crisis of 2011.

Despite all these factors, the behavior of credit in Spain is being more cautious than what the conditions of both the market and the economy itself seem to require a priori. Although banks must manage their risk prudently, the health of their balance sheets and much more generous margins than in recent years point to a certain amount of room for maneuver when granting credit. Giving it up excessively can contribute to a progressive deterioration of the economy that does not favor anyone.

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