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Cracks emerge in Eurozone mortgages

Updated: Apr 24, 2023

An interesting piece in the FT highlights the challenges in Spain. This ties into our views that the Eurozone is likely to be one of a number of areas face significant financial challenges and disruption in this rate hiking environment, and so needs to be a region of focus for litigators.

Cracked earth to show idea of cracked mortgage market

Image by Peter H from Pixabay

"The Bank of Spain says roughly three-quarters of mortgage holders in Spain have variable rate contracts, which are usually taken out for the duration of the loan. The proportion of flexible rate mortgages is equally high in neighbouring Portugal, but far lower in France and Germany where fixed-rate contracts are the norm," according to the Financial Times.

One of a number of asset classes that are likely to be under pressure, Spanish and Portugese property standout for their reliance on variable rates and so immediate vulnerability to the current aggressive rate hiking cycle. Banks, property companies and investment vehicles may all be impacted in due course.

The most significant risk is political. A decade of low interest rates following the Great Financial Crisis, masked perennial tensions within the Eurozone between the high-income north and the more vulnerable Mediterranean states. Incoming Prime Minister of Italy, the right wing Giorgia Meloni, has already voiced her concerns about the ECB's rate hiking stance.

Courtesy FT and the ECB - Mortgage rates rising across the Eurozone.

For its part the European Central Bank is adopting policy that is closely coordinated with its international counterparts. Aside from strikingly similar policy statements, world economies face some many of the same challenges: supply side inflation from the Ukraine war, post pandemic disruption, China's zero covid policy, and potentially the beginning of de-globalisation.

Inflation is a particularly punitive economic force for those with lower incomes. They tend to own fewer assets and their incomes rarely keep up with the rising price of goods. In its warning to the UK, during the 'mini budget' crisis, the IMF notably mentioned its concerns about policies that widen 'inequality'.

There is of course a political dimension to this, as policy makers are undoubtedly wary of the impact of policy on democracies in general, that have been grappling with the implications of social inequality through a series of political movements across the Western world.

However, this battle against inflation endangers asset classes and institutions that are too reliant on debt. Property is notable, but banks and leveraged corporations are also vulnerable.

Finally a decade of low interest rates, likely continued the proliferation of interest rate and currency derivatives. Many of these contracts traditionally allow users to earn income by selling volatility in some form or another. The past decade's calm (relatively) environment would have made these investments feel safe, but the recent volatility could result in a rude awakening for users.

We think litigators need to get on their marketing bikes and start paying attention to these ripples in financial markets. These are quite dramatic periods of change, and it would be surprising not to see substantial losses creeping up in various sectors: and that of course is a key indicator of future litigation.

Since 2009, we have provided banking, derivatives and other expert witnesses. Contact us if you would like to discuss these or other issues. See our testimonials here.

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Glossary or articles

FT on Spanish property

ING Bank on Spanish property

The Journal on EU rate hikes

European Bank choice: mortgage distress or interest rate caps

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