Forex Flash: Quality of lending declines in Spain – Goldman Sachs

FXstreet.com (Barcelona) - Alongside the fall in lending volumes, the quality of lending in Spain has also declined. According to the Economics Research Team at Goldman Sachs Too much credit is extended to unhealthy sectors with poor growth prospects, such as construction, and too little net new credit creation towards more growth-friendly entrepreneurial and export-oriented sectors. This suggests the reallocation of capital has been somewhat inefficient, providing too little support to economic restructuring.”

Policy support from the ECB has been essential in avoiding a disorderly deleveraging by banks. Yet there have been costs associated with this support, which may have contributed to the low quality of lending and too little economic restructuring. The generous provision of bank funding has reduced bank balance sheet flexibility and encouraged banks to ‘evergreen’ existing loans. “These steps may have resulted in insufficient new credit becoming available, thus raising the costs of unsecured funding.” the team adds.