Varied Impact: Rising Mortgage Rates and Debt Dynamics in Southern Eurozone Countries"
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However, while interest rates on corporate loans do not differ significantly across eurozone countries, interest rates on mortgages do. In countries with more variable mortgage rates, average mortgage rates have increased almost in tandem with the rates for new loans. In the Netherlands and Germany, where fixed-rate mortgages are the norm, average mortgage rates have so far barely increased. In the Netherlands, they’ve gone up from 2.3 to 2.5%, while in France, they increased from 0.8 to 4%.
The impact of higher mortgage burdens could play out through adjustments in the housing market – transactions are already way down in Spain by 15% year-on-year in November, as we also discuss in this more detailed piece on the Spanish housing market. They could also result in weakened consumption as they reduce the opportunity for disposable spending elsewhere.
And there is another transmission channel through which higher mortgage rates will affect economies: redemptions on mortgage loans have increased markedly in Italy and Spain since higher rates have kicked in. This essentially means that higher rates have kicked off a process of household deleveraging in the south, which will weigh on consumption and economic activity.
Average mortgage rates have risen far faster in southern eurozone markets and France
The differences also hold when looking at how debt burdens are developing. So far, the impact has been small, but differences between countries are visible when looking at government, non-financial corporate and household interest payment developments. When looking at net interest rate payments for corporates, we see that German and Dutch companies have yet to see any impact so far. This could also be because they hold more cash reserves, which have started to generate positive interest flows. In Spain, Italy and France, net interest payments have risen to the highest level in more than seven years
Net interest rate payments for corporates are increasing faster in the periphery and France
For governments, the same holds true. While most countries have lengthened the average maturity on their debt, higher rates are starting to result in higher interest payments. We note that the increase has been fastest in Italy, where net interest rate payments have returned to 2015 levels. France has also seen a jump, but at much lower levels, while Spain has so far managed to stave off a runup in interest rate payments.
Overall, expect the gap to widen as more debt gets rolled over. This will cause discussions about austerity to become more pressing. Then again, at this point, it is clearly Germany that leads the way in terms of belt-tightening, so we don’t see austerity efforts moving along the traditional north-south lines in 2024.
The impact of tightening on the periphery now looks worse than for the north
Even if ECB rates have peaked, and we might even see rate cuts later this year, 2024 will still be one where the full impact of monetary policy tightening of the last 18 months will unfold. While southern eurozone countries surprisingly seemed to defy the adverse impact of monetary policy tightening last year, we fear we'll not see something similar in 2024.
