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Demand for credit eases but still growing by 15%
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1-year Euribor up again in March.
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Interest rates on loans and credits granted to companies and households moved slightly down in January following the increases seen over the past two years. On average, interest rates on funding to the private sector stood at 6.0%, some 3 basis points lower than in December. The 1-year Euribor, which is widely used as a reference, dropped in February for the second consecutive month to stand at 4.35% at mid-month only to rise again in March going to the level of 4.7%.
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The trend in interbank and loan rates in recent months reflects the pressures in financial markets in the period of upsets that broke out last summer as a result of the subprime mortgage crisis in the United States. This also is affected by expectations of a cut in the European Central Bank official rate although this body has maintained its anti-inflationary position.
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In this framework, the slowdown in financing granted to the private sector lost some strength in January 2008 and the annual change rate stood at 15.1%, one decimal less than last year. Nevertheless, this growth continues to be higher than that in the Euro Area as a whole.
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Companies continue having recourse to bank credit...
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Funding granted to companies eased slightly in growth rate in February going to 16.9%, in line with the economic situation. Leasing, which goes into corporate investment, was up 16.0% for the 12 months ending in January, some 2.3 points more than in December. Commercial credit, used to provide working capital, showed a much lower growth rate at 7.9%.
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...despite sharp drop in funding of real estate activities in 2007.
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It is possible to make an analysis by economic sector using the figures recently published by the Bank of Spain dealing with loans by purpose, although this goes only up to December. In 2007, there was a notable drop in credit for construction with growth going from 33.3% in 2006 to 14.2% in 2007. Services also showed a drop although this was mainly due to funding for real estate activities. This went from an annual increase of more than 50% in 2006 to 24% in December 2007. On the other hand, credit granted to industry was up by 18.5% in 2007, some 4.4 points more than one year earlier.
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Household debt ended its slowdown in January maintaining a growth rate of 12.7%. This was the result of less of a slowdown in housing loans and some drive in other funding granted to households, which was up 12.0% in the past 12 months. Loans going into consumer durables such as cars, motorcycles, furniture, etc., which make up nearly one-third of this credit, were up 9.9% in 2007, a little less than in the previous year, under the effect of the rise in interest rates.
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Slight rise in default rate although this still substantially below European average.
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On the other hand, we note a slight rise in default in keeping with change of stage in the economic cycle. The default rate in January stood at 1.04%, some 0.28 points higher than the level 12 months earlier. Nevertheless, it stands at a very low rate substantially below the European average. Furthermore, Spain’s financial institutions have a high level of provisions. In greater detail, although using figures only up to December, we note that the default rate on housing loan mortgages stood at an even lower level, 0.72% at the end of 2007.
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Number of mortgage loans down 5% in 2007.
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In addition, some 1,768,198 mortgage loans were granted on rural and urban properties in 2007, a drop of 5.1% compared with the year before, according to figures from the National Institute of Statistics. The average amount of each mortgage loan was 149,007 euros, an increase of 6.2% over 2006. The savings banks were the institutions granting the largest number of mortgage loans in 2007 (59.2% of the total), followed by the banks, with 31.7%. The average term of mortgage loans was 26 years, one year more than the year before. Most mortgages were drawn up with a variable interest rate while 2% were at fixed rate.
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With regard to geographical spread of mortgage loans, the autonomous communities with the most mortgages per person in 2007 were Murcia and the Balearic Islands. Nevertheless, the biggest growth took place in Extremadura (18.6%) and Castile-La Mancha (8.2%).
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Savers prefer high-return deposits
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With regard to financial assets of the private sector, we note that bank deposits in January 2008 showed an annual rise of 15.6 %, equal to that in December 2007. This meant considerable growth, higher than that recorded in the Euro Area. In any case, resources were not enough to finance the volume of loans granted by financial institutions and these had to have recourse to bond issues and to the European Central Bank. Given the problems in capital markets that broke out last summer as a result of the US subprime mortgage crisis, the financial institutions have done their utmost to attract deposits from the private sector, especially with time deposits, which were up 4.5% in January, going above the inflation rate.
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As a result, time deposits for up to a two-year term were the type to show the biggest annual increase in January (42.5%). On the other hand, on-sight and savings accounts showed a slight drop because of low returns offered.
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String of net withdrawals from mutual funds continues in February.
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With regard to other financial products, participations in mutual funds continued a series of net withdrawals in February, although these were less than in the month before. Observers could note aversion to risk among savers, something made clear by net positive subscriptions to guaranteed bond-based funds. Average return on mutual funds was slightly negative in February as a result of capital losses by share-based funds. Nevertheless, share-based funds of emerging markets enjoyed annual gains of 14.2%. On the contrary, Japanese share-based funds showed losses of 26.1%.
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In turn, hedge funds continued to increase their assets. During their short experience in the Spanish market, they had accumulated assets for a value of 1.19 billion euros at the end of February, in spite of the instability of international financial markets.
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Health insurance shows strong in 2007.
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Finally, in the insurance field, life insurance premiums amounted to 22.93 billion euros in 2007, a rise of 2.1% compared with the year before. Premiums for other direct insurance amounted to 31.71 billion euros, an annual increase of 5.3%. The busiest branch was health insurance with an increase of 9.6% in premiums, followed by multi-risk which showed a rise of 7.9%. The most important branch in terms of volume, car insurance, rose by only 2.7% due to the fact that strong competition pushed down premium levels.
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