Euro rescue fund warns of “pressure” from variable-rate loans in Portugal

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The European Stability Mechanism (ESM), the eurozone’s bailout fund, today warned of high inflation and tight financial conditions in Portugal, speaking of “additional pressure” on households from high variable-rate loans.

“Downside risks [to economic growth] stem from persistently high inflation, tighter financial conditions and weakening external demand. The high proportion of variable-rate mortgages is also putting additional pressure on the financial health of households”, notes the ESM in its annual report published today, the day of its Board of Governors’ meeting in Luxembourg.

In the chapter devoted to Portugal – which benefited from a macroeconomic adjustment program between 2011 and 2014 – the euro rescue fund notes that “the European Commission forecasts a significant moderation in Portugal’s GDP [gross domestic product] growth in 2023, of 1%, and a fall in headline inflation of 5.4%”.

“This reflects some stabilization after the post-pandemic recovery and a loss of purchasing power due to inflation,” it adds.

In this annual report, which focuses mainly on 2022, the MEE points out that last year, “Portugal’s strong economic growth was driven by private consumption and exports, despite the sharp rise in inflation and the tightening of financial conditions”.

With regard to the financial sector in particular, “market access conditions remained favorable, despite rising sovereign bond yields”, according to the EU rescue fund.

At the same time, in 2022, “the profitability of Portuguese banks recovered as interest rates rose and credit quality improved”.

“The banking sector’s profitability continued to recover in 2022, as asset quality remained good and new cost-cutting initiatives bore fruit. Loans previously subject to moratoria mostly resumed regular payments, helping banks to reduce loan losses, but overall capital ratio levels fell as rapidly rising interest rates triggered mark-to-market losses and dividend distributions resumed and, as a result, […] banks became more risk averse and tightened lending conditions to non-financial companies and households,” MES lists.

With regard to the Portuguese budget balance, the mechanism notes that “the general government deficit decreased, thanks to a recovery in revenues and lower-than-expected public investment”.

“Public debt continued to fall as a percentage of GDP”, it adds.

Based in Luxembourg, the ESM is an intergovernmental organization set up by eurozone member states to prevent and overcome financial crises and maintain financial stability and long-term prosperity by granting loans and other forms of financial assistance to countries in serious financial difficulty.

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