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ECONOMY

Spain downplays ECB criticism of new windfall tax

Spain's leftist government on Friday defended a proposed windfall tax on banks after the European Central Bank raised concerns that it could lead lenders to provide less credit and damage their capital position.

felix bolaños spain
Spain's new Minister of the Presidency Felix Bolaños has said his government will "study in detail" the ECB's report and that his administration is open to "improving it", whilst stressing that the ECB's verdict is "non-binding". (Photo by PIERRE-PHILIPPE MARCOU / AFP)

The government in July introduced a draft bill to slap a temporary 4.8 percent charge on banks’ net interest income and net commissions in 2023 and 2024 to fund measures to ease cost of-living pressures.

In a non-binding legal opinion published Thursday, the ECB recommended Madrid conduct a “thorough analysis of potential negative consequences for the banking sector” of the tax.

This is needed “to ensure that its application does not pose risks to financial stability, banking sector resilience and the provision of credit.”

Asked about the legal opinion on Friday, Spain’s Economy Minister Nadia Calviño said the government had “already taken into account the questions raised” by the ECB when it drew up the tax.

Spain’s Minister of the Presidency Felix Bolaños told Spanish public broadcaster RTVE that his government will “study in detail” the ECB’s report and that his administration is open to “improving it”, whilst stressing that the ECB’s verdict is “non-binding”.

Spanish banks have posted record profits and have “very high solvency ratios” so there is “no reason” for this temporary tax” to lead to less credit being granted by lenders, she added.

Top executives at Spanish lenders such as Santander and BBVA have said that the proposed tax would directly hit their profitability.

Socialist Prime Minister Pedro Sánchez’s government has said it expects to raise around €3 billion with the tax by 2024, which it will use to fund measures to help consumers deal with soaring inflation.

Like other countries, Spain has been struggling with soaring inflation as a result of the fallout from the war in Ukraine and the reopening of the economy after pandemic-related lockdowns.

Inflation in Spain peaked this summer at 10.8 percent in July, its highest level in 38 years, before moderately slowing to 7.3 percent in October — still well above normal levels.

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TAXES

Spain’s deputy PM proposes freezing mortgage rates

Yolanda Díaz, Spain's Deputy Prime Minister and Labour Minister, has called for a freeze on variable mortgage rates amid news that Spain's biggest banks have enjoyed a bumper year of record profits.

Spain's deputy PM proposes freezing mortgage rates

Yolanda Díaz, Spain’s Labour Minister and the ideological force behind sweeping labour market reforms, has called for a freeze on variable rate mortgages following news that some of Spain’s biggest banks reported billions in record profits last year.

On Wednesday, BBVA reported a 2022 profit of €6.4 billion, the largest profit in its history. Driving this profit, the bank’s interest margin grew by a whopping 30.4 percent, commission income by 12.3 percent, and loans by 13.3 percent.

Banco Santander posted an annual net profit of €9.6 billion, up 18 percent from 2021 and higher than forecasted by analysts polled by financial data firm FactSet.

READ ALSO: Banco Santander posts record profit as rates rise

Given these record-breaking profits, especially against the backdrop of a prolonged cost of living and inflationary crisis in Spain, Díaz has said the government must act decisively to “freeze mortgages” and “moderate profits.”

“The crisis cannot be an excuse to earn more,” she said, adding that the rise in the Euribor rate is “very serious”, with the average increase (estimated to be €258 per month) “impossible to bear” for normal Spaniards.

Euribor is the interest rate most often used to work out mortgage payments and calculate both variable and fixed rates.

READ ALSO: What the Euribor rise means for property buyers and owners in Spain

It is anchored to the interest rate set by the European Central Bank (ECB), and, as we are now seeing, quite responsive to global economic events. By the end of January, the rate had risen to almost 3.4 percent, the highest level since December 2008.

“While the rise of the Euribor will increase the average mortgage payment by €250 per month, BBVA’s profits grow by 38 percent to reach €6.4 billion, the largest in its history. The crisis cannot be an excuse to earn more. Freeze mortgages, moderate profits,” Díaz wrote on Twitter on Wednesday January 31st.

Banks respond

Unsurprisingly, Spanish banks are not exactly keen on Díaz’s idea. BBVA President, Carlos Torres, said “I trust what will happen is that the benefits of a market economy continue to be defended”. 

Torres also tried to remind people of the “negative years” that BBVA has endured, with “many billions of negatives”. 

It remains to be seen how persuasive Spaniards or the Spanish government find this comparison, or whether Díaz’s Twitter idea will translate into policy.

Windfall tax

Díaz’s call for a mortgage rate freeze is in line with the Spanish government’s approach to the excess profits of banks and energy companies. In July, the Spanish government introduced a temporary windfall tax on excess profits in order to fund some of the extraordinary measures it was implementing to help the most vulnerable in Spanish society deal with the cost of living crisis.

The government in July introduced a draft bill to slap a temporary 4.8 percent charge on banks’ net interest income and net commissions in 2023 and 2024 to fund measures to ease cost-of-living pressures. Between the new taxes on banks and energy companies, they should generate around €7.0 billion for the state coffers in 2023 and 2024. 

However, in November the ECB published a non-binding legal opinion that suggested Madrid undertake a “thorough analysis of potential negative consequences for the banking sector” of the tax.

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