In an article in the Financial Stability Report released today, ECB economists note that lower-income households tend to be the most likely to default.
ECB Vice President Luis de Guindos will present the report on Wednesday at a virtual press conference, from which the ECB expected some information today.
The countries where banks will have the most problem loans due to defaults due to inflation and rising interest rates are Cyprus, Greece, Ireland, Spain and Portugal.
Banks in these countries already had higher interest rates on these loans before prices rose so much and the ECB started raising interest rates.
The deterioration in asset quality will affect banks in countries with a higher share of loans to lower-income households, which are more affected by inflation and rising interest rates and have fewer liquid assets.
Low-income households spend 70% of their income on basic expenses such as food, energy, or housing, compared to 34% of middle-income households.
The impact of higher interest rates in the short term is smaller for fixed rate loans, but much larger for variable rate loans.
However, in the medium to long term, the rise in the price of money will lead to higher mortgage rates, which will significantly increase the cost of debt repayment for families who took out mortgages in years when interest rates were very high.
A 10% increase in basic living expenses that is not offset by rising incomes reduces purchasing power by more than 20% for low-income households, compared with 5% for middle-income households, according to ECB economists. .
“Lower income families have little financial margin to cushion higher food and energy prices,” especially in countries with high debt and low savings, the ECB report adds.
The increase in interest rates will hit households in countries where mortgages are mostly issued at floating rates.
Households are the largest beneficiaries of bank loans in the eurozone.
Secured mortgages accounted for over 75% of household debt on bank balance sheets in the second quarter of 2022, while unsecured consumer loans accounted for 10%.
More than 70% of household bank debt in the eurozone is held by higher income households, compared to 13% by lower income households.
But the percentage of consumer loans that historically default more than mortgages is much higher among low-income households.
The majority of NPLs in banks are mortgages, but in some countries there are many more NPLs.
