Tuesday, 14 June 2011

Who stands to lose more from further ECB rate hikes

With talk about further rate hikes from the ECB intensifying I think that trying to gauge who would be most hurt from any more of those is interesting.

It is no secret that in many EU countries, households’ balance sheets are piled with debt and as a consequence are pretty vulnerable to rate hikes while at the same time they are threatening to drag private consumption down with them (or in some occasions drag it further down).

source: Eurostat

From the countries that are part of the EMU the ones where households’ balance sheets appear to be more badly battered seem to be Netherlands, Ireland, Spain and Portugal. Mostly the PIIGS are in for the chop then.

I thought that looking at how private consumption fared in 2008 when the ECB rate hike-cycle ended would be interesting.

source: AMECO

As you can probably see from the chart, the countries where private consumption was weaker were Ireland, Spain and Italy.

Private consumption in Portugal and Netherlands was soft but it fared somewhat better that the three aforementioned countries.

A further factor that we have to take into account is whether the majority of mortgages in those countries are variable rate ones or fixed rate ones.

The better relative performance of Netherlands can be attributed at exactly that; the fact that the vast majority of mortgages are fixed rate ones.

For Portugal the answer lays at its lower savings rate I think, but then this could be way of the mark.

Well, for Ireland and Spain the answer’s pretty predictable. Besides the debt-burdened household balance sheets the other culprit are variable-rate mortgages. The vast majority of the mortgages taken up by households were variable rate ones. The same goes for Italy and Greece.

source: Eurostat

Of course things in 2011 are pretty different from 2008 and not in a good way at that. 

source: Eurostat
Ireland is deep into austerity, the unemployment rate has essentially tripled and gross disposable income’s trajectory has made the term “plummeted” seem like a euphemism.

Things for Portugal are a bit better, unemployment’s rise was more contained (at least until now) and nominal gross disposable income has risen (though I think that it has undoubtedly declined in real terms), but it’s (probably) all downhill from here on.

Unemployment in Spain has exploded upwards, doubling from the level it was in 2008. As for gross disposable income, for some bizarre reason Eurostat’s data about it did not include Spain.

Italy is in the better shape for now. Gross debt to income ratio is much lower and unemployment has risen but not monstrously so.

The rate hikes from the ECB will probably not be that hefty, but the situation prevailing in Ireland and Greece is such that even “small” rate hikes can tip things over the edge. So things in PIIGS can only get worse from any further rate hikes. At the same time rising interest rates cannot do much in the way of curbing inflation, since this is not demand-side inflation. I have talked about this in an older post.

It is more than obvious that things in the EU are “a bit” shaky at present and can change overnight, so let’s see what actually happens...

P.S. All data about mortgages were taken from: The structure of European mortgage markets, Allianz Dresdner Economic Research, Working Paper No.: 97, 22.01.2008, Authors: Andreas Hess, Dr Arne Holzhausen

P.S.2 I have ignored the effect that rate hikes could have on corporates, but this makes it not any less detrimental. Corporates are equally stressed and I don't have to tell where an implosion of them could lead.

P.S.3 Variable-rate mortgages are linked (mostly) with Euribor which fluctuates along with the ECB reference rate and price in expectations of further ECB action along with moneymarket conditions.

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