Spain 
Italy 
Greece 
IMF Warns that Portuguese Families Are Vulnerable to a Spike in Interest Rates
13 September 2018
The fund led by Christine Lagarde says that high levels of indebtedness are increasing the risk that families face within a scenario of rising interest rates, and their greatest vulnerability stems from the housing sector.
The International Monetary Fund (IMF) is concerned about Portuguese families’ high level of indebtedness. The institution led by Christine Lagarde believes that their debt burden is making them “vulnerable” not only to “negative income shocks” but also to “interest rate spikes.”
In the report presenting the IMF’s conclusions under the 2018 Article IV consultation for Portugal, which the fund released on Thursday, the IMF took a closer look at the credit market I the country. It stressed that “high leverage makes Portuguese households and companies vulnerable to negative income shocks and interest rate spikes.”
The institution based its contention on data regarding the concession of loans. Last year, households’ credit balance entered positive territory for the first time since 2011. In other words, the amounts of the new loans exceeded the amount reaching maturity, a result of the increase in consumer and housing loans. The IMF also noted Portuguese households’ low level of savings, noting that the rate stood at just 5.4% of disposable income last year.
“These developments are translating into a slowing down of the deleveraging process,” the IMF warned, adding that it is also concerned with the high level of private indebtedness. Last year, Portuguese families’ indebtedness reached 73.4% of GDP, compared to 56.2% for the eurozone as a whole.
The IMF’s alert came at a time when the environment of historically low interest rates is beginning to go into reverse. Signs currently point to an increase in Eurozone benchmark interest rates starting in the summer of next year. Euribor – which is the index that most mortgages track in Portugal – will accompany the increase in benchmark rates.
A potential spike in rates is the basis for the IMF’s concern. The “preponderance of variable rate loans” in Portugal, in addition to “long loan maturities (33 years on average) that often extend through retirement. ”
IMF applauds BdP but calls for more
The long loan maturities on mortgages have already generated concern at the Bank of Portugal (BdP). The institution led by Carlos Costa included a reduction of these maturities among the bank’s set of three recommendations for the Portuguese banking sector, which came into effect in July. The measure was intended to restrict the flow of credit.
The recommendations focus on limiting loan maturities, financing ratios and debt servicing, goals which are applauded by the IMF. “The team welcomes the application of these macro-prudential measures at this juncture of easing credit standards,” the IMF said, stating that the measures would “stem the easing by reinforcing the resilience of financial institutions and households to changes in real estate prices, interest rates and yields.” However, the IMF added that the Portuguese authorities should closely monitor the implementation of these measures, “as well as “supplementing them, if necessary.”
Attention to housing prices
The IMF also stated that price developments in the real estate market should be closely monitored. After a 20% increase in housing prices over the last four years (7.9% in 2017) in Portugal, the fund asked that authorities improve data quality and real estate analysis tools to better monitor risks in the sector.
The fund also called for “monitoring of financing markets and the evolution of risks to banks stemming from developments in real estate markets.” The IMF applauded the reduction in NPLs by local banks while adding that a potential housing crash could jeopardise the banks’ efforts so far to clean up their balance sheets and continue making contributions to the growth of the Portuguese economy.
Original Story: Economia Online – Catarina Melo
Translation: Richard Turner