ECB’s de Cos: Tighter Financing Conditions Could Impair Firms’ and Households’ Ability to Pay

24 June 2022

By David Barwick – FRANKFURT (Econostream) – Tighter financing conditions in the wake of the European Central Bank’s policy normalization could make it harder for firms and households to make needed payments, ECB Governing Council member Pablo Hernández de Cos said Friday.

De Cos, who heads Banco de España, said in a speech in Madrid to the Association of Economic Information Journalists that ‘[a]lthough the direct financial exposures of Spanish banks to Russia and Ukraine are very small, the indirect effects of the war may be significant.’

In addition to harming trade and confidence, elevated uncertainty due to the war is leading to increased risk premia and greater volatility, he said. In addition, the conflict is impacting raw materials prices, he said.

‘Moreover, the process of monetary policy normalisation, which is necessary to moderate inflationary pressures, has already led to a tightening of financing conditions for the economy’, he said. ‘This scenario could undermine the ability of households and firms to pay, particularly in those segments where the post-pandemic recovery was slower or more delayed.’

The Spanish central bank sees real GDP growth in Spain of 4.1% this year and 2.8% next year, with inflation coming in at 7.2% and 2.6%, respectively, he noted.

‘The risks to the central scenario of these projections are to the downside for activity and to the upside for inflation’, he said. ‘This is against a background of extraordinary uncertainty, linked in particular to the duration and intensity of the war in Ukraine.’

‘A hypothetical higher degree of pass-through of recent price and cost increases to other prices in the economy and to wages is a highly relevant additional source of risk’, he continued. ‘Other sources of risk include uncertainties about the pace of the actual deployment of NGEU funds in our country and the possible consequences of the monetary normalisation process in terms of the degree of tightening of financing conditions.’

If the war does not worsen and there are no other shocks, Spain would continue on a ‘gradual recovery path’ and possibly achieve pre-pandemic output levels in the second half of next year, while inflation would stay high for some months, ‘before moderating progressively thereafter’, he said.