The vice president of the European Central Bank, Luis de Guindos, stated that converting the region’s debt into permanent, low-interest obligations could be preferable to a full write-off. The remark came during a colloquium following the 28th Trobada d’Economia in S’Agaró. Asked about the debt amnesty agreed upon by the socialists and the ERC, Guindos offered his personal view and noted that debt amnesty is not highly favorable for markets.
Some experts have proposed turning the debt into enduring, low-cost debt, a concept that has drawn positive responses from financial markets.
In his remarks that day, Guindos emphasized that inflation in the euro area will likely stay elevated for a while longer, even as it shows a downward trend. He asserted that monetary policy measures do influence an economy, stressing that the aim is not a recession but that inflation cannot be declared defeated, as factors could keep the price level rising.
Bank of Spain foresees a long period of restrictive rates
Guindos, continuing the ECB’s stance of tempering expectations about a rapid fall in consumer prices, warned that if rates stay high for an extended period, inflation will move toward the central target. Market warnings about sustained high rates have persisted for months. Pablo Hernández de Cos, the governor of the Bank of Spain, had already signaled this outcome during a spring conference in Barcelona.
From the ECB vice president’s perspective, higher interest rates affect credit conditions and financial markets. There is another phase to consider, where the transmission to real economic activity remains uneven and often materializes with a delay of 12 to 18 months.
Regional debt forgiveness surfaces in negotiations between PSOE and ERC
Bank profitability
Guindos also addressed banks, noting that profitability has been strong. He pointed out that European banks averaged just over 4 percent profitability in 2019 and presently exceed 10 percent. He observed that investors expect lending institutions to bolster provisions and acknowledge that rising capital costs could temper gains, viewing the current profitability surge as a temporary phenomenon that may not be sustainable in the long run.
The ECB vice president highlighted legislative uncertainty as a risk, including banking taxes enacted by some nations, such as Spain. He described the current economic environment as one marked by a slowdown and inflation pressures. He warned that growth may undershoot expectations and that employment gains might outpace GDP growth. He also noted that geopolitical risks and new fiscal rules could close the four-year window of generous fiscal policy in the euro zone.
At the opening ceremony of the day organized by the Olaf Palme International Foundation, the president of the Spanish Chamber, José Luis Bonet, underscored that the economy is in a cooling phase where consumption is cautious and investment hinges on the business environment. Bonet suggested that tourism could help cushion corporate difficulties and called attention to concerns about the education system, especially vocational training, while criticizing pension reform as imposing additional burdens on companies.