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Banco de Portugal warns of risk of default on property financing.

The geopolitical climate is “tense”, given inflationary pressures, high interest rates and the “relative turbulence” in international financial markets. This is how the Bank of Portugal (BdP) describes the current macroeconomic context that we live in today, full of uncertainty and risks. The regulator led by Mário Centeno identifies the increase in defaults on housing loans and the cooling down in the residential market as two of the main risks to financial stability.

In the Financial Stability Report published this Wednesday, May 10, the BdP concludes that, in recent months, "the risks to financial stability have remained high". And among the main risks and vulnerabilities is precisely the “potential default of the most vulnerable families, due to high inflation, rising short-term interest rates and a potential worsening of the unemployment rate”.

Although there is a greater risk of default on housing loans, the Portuguese regulator recalls that there are factors that can help mitigate it, such as improving the risk profile of borrowers, reducing the debt ratio, high employment rates or the implementation of government measures to support families, including support for housing credit installments.

The potential default of the most vulnerable companies is also a risk for the Bank of Portugal, which considers that, “despite recent evidence of resilience in the sector, a more unfavorable economic and financial context, characterized by lower economic growth and higher interest rates , will increase the percentage of vulnerable companies”.

Cooldown in home buying and selling is a risk – prices could go down

The Bank of Portugal is also keeping an eye on the cooling of the residential real estate market, as it admits that there is a risk that this decrease in demand will have an “impact on prices and on the value of collateral for loans secured by real estate”, he explains.

“At the end of 2022, there was a slowdown in house prices and transactions in this market. In a context of rising interest rates, there may be some price correction in the residential real estate market”, admits the regulator led by Márcio Centeno.

Even so, he considers that the impact of the drop in house prices on Portuguese banks should be limited. “Even in the event of a more significant drop in prices, the distribution of mortgage loans by Loan-to-value ratio suggests that the banking system should not incur high losses. In the case of commercial real estate, the exposure of the banking sector is limited and considerably lower than that of residential real estate, and capital requirements are much higher, limiting the potential impacts of adverse developments in this market”, concludes the same report.

Banco de Portugal is aware of the turbulence in the financial markets

Uncertainty in the current macroeconomic context has increased after the collapse of Silicon Valley and Signature banks in the US and the financial instability felt at Credit Suisse in Europe. On this point, the BdP admits that Portugal is not immune to the increased turbulence in the international financial markets and is very attentive to the potential effects of contagion between the financial and economic cycles.

The truth is that this storm has left the international financial markets even more stressed and volatile. And “the impacts were particularly visible in the valuations of the securities of financial institutions more exposed to interest rate risk and may also trigger liquidity difficulties”, points out the regulator.

Read the article in full here

Source: Idealista


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