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Growth of credit slows
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12-month Euribor likely to hit ceiling in September.
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The 12-month Euribor, the reference rate used for many types of loan, especially mortgage loans, continued to rise in August going to 4.67% thus showing the highest level since December 2000. Over the past year the 12-month Euribor rose by 105 basis points with a carry-through of a similar rise in the European Central Bank official interest rate. Given that this rate is expected to rise to 4.25% in coming months and, especially as a consequence of increases in the interbank rate arising from the US sub-prime mortgage crisis, the 12-month Euribor is still likely to go up a little on monthly average in September. Nevertheless, it may already have hit a ceiling.
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Growth of funding granted to private sector much higher than in Euro Area as a whole.
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As usual, lending institutions have carried through increases in the interbank rate to customer transactions with some slight delay. As a result, the average interest rate on loans and credits granted to the private sector stood at 5.63% in July, an increase of 102 basis points compared with the same month last year. Given that the inflation rate dropped by 1.8 percentage points in the same period, the increase was still more significant in real terms.
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In this context, funding granted to the private sector continued to decrease in July and showed a year-on-year change rate of 19.8%, some 4.4 points less than in December 2006. Nevertheless, this is still a high growth rate well above that in the Euro Area as a whole and reflects notable economic strength.
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Impact of sub-prime mortgage crisis likely to sharpen drop in funding granted to companies.
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So far this year, the increasing slowdown in funding has shown up among companies which have gone from annual growth of 27.9% in December to 22.7% in July. Nevertheless, they continue to show a higher year-on-year increase than households. The impact of the international financial market crisis set off by sub-prime mortgages in the United States is making it harder for companies to get financing in capital markets which had reached spectacular growth levels so that it is likely that the drop in corporate financing will continue.
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Number of mortgage loans granted in first half-year down 1.7% compared with same period last year.
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The volume of loans and credits obtained by households rose by 16.1% in the last 12 months ending in July, some 3.5 percentage points less than in December. This drop was largely due to a slowing down in home-purchase loans. Loans for this purpose went down to growth of 17.0% in July compared with 20.4% at the end of last year. As well as the rise in interest rates, the high prices being reached for housing and tougher terms for borrowing against mortgage security are slowing down mortgage loans.
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In June, according to figures from the National Institute of Statistics, the number of mortgage loans granted dropped 5.2% compared with the same month last year. In the first half-year as a whole the number of mortgage loans registered was down 1.7%. Nevertheless, funds lent in the first half of the year rose by 9.1% compared with the same period in 2006 with the average figure per mortgage loan going up by 11.1%.
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Not only loans for home acquisition were down. In spite of marketing campaigns to foster consumer credit, other loans showed a similar drop in recent months, as may be noted in the above graph, in keeping with the easing off in consumption.
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On the other hand, the recent rise in interest rates has brought about a slight increase in default. The doubtful loans rate, that is to say, the quotient between the figure for doubtful loans and total loans to the private sector by all lending institutions stood at 0.79%. Nevertheless, this is a low level that stands close to the all-time low of 0.72% recorded at the end of 2006.
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Slowdown in growth of bank deposits
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Sharp increase in deposits for terms up to 2 years following coming into effect of new tax rates on savings.
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Bank deposits of companies and households have also shown a slowdown in recent months. At the end of July they reported an increase of 20.8% compared with the same month last year, some 4.5 points less than at the end of the first quarter. The sharp increase in deposits in recent months has been fostered by a considerable increase in returns. The interest rate on time deposits for a one-year term was above the annual inflation rate in September 2006 and since then has substantially increased in real terms.
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The type of deposit to show the biggest increase in relative terms was those in foreign currency fostered by favourable interest rate differentials. Nevertheless, these made up only 3.7% of the total. Time deposits for up to a 2-year term also showed sharp growth, due to the new tax rate on savings that removed any discrimination in matters of term. On the other hand, on demand and savings accounts rose by only 4.1% in the past 12 months because of lower returns.
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In spite of the sharp increase in deposits in recent months, this was not sufficient to finance the growth of loans so that financial institutions had to have recourse mainly to bond issues and securitizations. The crisis set off by US sub-prime mortgages posed difficulties for this type of financing so that deposits have regained importance.
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Average annual return on investment funds in August well over twice inflation.
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Bank deposits are representing fierce competition for other financial products in household portfolios, such as investment funds. The assets of investment funds underwent a drop of 1.26 billion euros in August, according to figures supplied by Inverco, the association of investment managers. This drop was due to capital losses arising from the upsets in financial markets although there were also net sales of participations amounting to 400 million euros. The main outflows from funds in August took place in global funds and in European share-based funds, while short-term bond-based funds, which are more conservative, were on the rise. Since January, the assets of investment funds have increased by 0.7% going up to 256.08 billion euros, thanks to capital gains obtained, seeing that in the first eight months of the year there were negative net flows in participations for an amount of 2.39 billion euros.
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Sub-prime mortgage crisis fails to halt growth of Spanish hedge funds.
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As a result of the upsets in financial markets, the average yield on investment funds dropped somewhat in August. In any case, the average annual yield stood at 5.0%, more than twice the inflation rate. Emerging country funds headed the ranking with 30.3% followed by national share-based funds at 21.8%. Only Japanese share-based fund showed losses amounting to 5.4%.
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With regard to hedge funds, which were in the eye of the storm on the international scene during the summer crisis, this crisis does not seem to have affected their recent showing in the Spanish market. At the end of August their assets stood at 481 million euros as against 240 million at the close of the first half-year.
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Vigorous growth of direct life insurance in first half-year.
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In addition, another financial instrument now enjoying the favour of savers is insurance. In the first half of 2007, premiums billed for direct insurance rose by 11.1% compared with the same period the year before to show a total of 28.7 billion euros, according to figures supplied by ICEA. Life insurance premiums were the most dynamic with an increase of 18.9%, as against a rise of 5.8% for the rest. Among this group, the most growth-oriented were health and multi-risk insurance which reported an increase of 9% in total premiums. The most important branch in terms of volume, car insurance, was up by only 3.6% due to sharper competition, which showed up in premium price levels.
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