The European Commission “concerned” about Spain’s high public and private debt

Yesterday the European Commission expressed its concern about the high levels of public and private debt that Spain registers. Specifically, public debt is what worries Brussels the most, which stressed that it continues to be high and entails risks for fiscal sustainability in the medium term.

The Community Executive has warned that “the risks to fiscal sustainability are high in the medium term, mainly due to the high level of public debt, the unfavorable initial budget position and the effects of population aging.” In its report on macroeconomic imbalances, it has also recognized that the public debt ratio has decreased in recent years, “until reaching 111.6% of GDP in 2022” and the prospect of it falling to 106.5% in 2024.

In fact, according to the autumn economic forecasts presented last week, the European Commission predicts that the debt-to-GDP ratio will follow a downward path in 2023 driven by nominal GDP growth to stand at 107.5% this year and stabilize at 106.5% in 2024 and 2025. This is how the Community Executive improved its outlook for the Spanish debt from the 110.6% for 2023 that it predicted in May, and the 109.1% that it estimated for 2024.

“In Spain, concern persists about the debt of households and non-financial companies, public debt and external debt, but debt ratios have continued to decline,” indicated the Community Executive in the report made public this Tuesday as part of the fall package. Furthermore, he stressed that “the strong growth of nominal GDP has contributed to the resumption of the extensive deleveraging process of the private sector and, to a lesser extent, the public sector.”

The European Commission’s analysis warns of macroeconomic imbalances in twelve member states, including Spain. In-depth reviews will also be carried out in Germany, France, Greece, Italy, the Netherlands, Portugal, Cyprus, Hungary, Romania and Sweden, to determine whether the imbalances detected a year ago are worsening, being corrected or have been remedied.

Among the risks that Brussels highlights for Spain is the high debt of non-financial companies, whose levels continue to be high although they are on a downward path. It moderated to 71% in 2022 and continued at that rate during the first two quarters of 2023. On the other hand, the corporate delinquency rate continued to decline in 2022 and in the first half of 2023. However, bankruptcies increased during the first half of the year, although they continue at low levels.

Regarding the debt of Spanish households, Brussels highlights the downward trend from 52% in 2022, when the increase in interest rates undertaken by the European Central Bank doubled the cost of new mortgage loans, specifically in the second half of last year and the first half of 2023.

The impact of the rise in the cost of borrowing, analyzes the European Commission, is “partially mitigated by the low incidence of variable rate mortgages in new loans.” On the other hand, the rise in house prices accelerated to 7.4% in 2022, and contributed to prices being overvalued by around 15%, although the rise in interest rates has contributed to their softening .