The rise in official interest rates by the European Central Bank is already reshaping financial plans for Alicante’s households and businesses. After a relatively short period, rates climbed from 0% to 1.25%, a move that will touch a wide range of loans and financing costs. While the aim remains to stabilize prices and prevent greater volatility, the auditor’s decision adds another layer of expense for anyone needing credit. As the adjustment filters through the markets, loans with variable rates or new fixed-rate agreements will reflect higher costs, potentially lifting annual interest payments by as much as 400 million across companies and families in the province. [Source: ECB announcements and national financial oversight reports]
The cost implications stem from higher loan rates. The Alicante private debt pool, from residents to small businesses, had not yet reached the peak seen just before the housing bubble burst in June 2008. At that moment, the outstanding loan balance in Alicante stood at 56,972 million euros, about 73% more than the 32,963 million euros recorded previously. The latest figures from the Bank of Spain, published in March, show the current exposure continuing to rise with rate increases. [Source: Bank of Spain data]
A 1.25% rate increase on this total position implies an uplift of around 412 million euros. It is important to note that some borrowers hold fixed-rate mortgages that will be insulated from immediate changes, while others with longer-term rate adjustments will see a gradual impact over time. [Source: financial impact analyses]
There is no doubt the bill is substantial and will add a new burden for firms already contending with a variety of challenges, beyond the immediate rise in mortgage payments. Analysts warn that higher financing costs will squeeze margins and tighten access to resources needed for other operations. Ricardo Miralles, Director of Economics and Analysis at the CEV regional employers’ association, emphasizes that the rate hike will translate into higher financing costs and could curb available liquidity for ongoing activities. [Source: regional economic council statements]
Additional resources are being channeled to manage public debt
The Alicante Chamber’s Labor Cabinet notes that higher interest rates are likely to dampen credit demand, which tends to slow consumption and investment and, in turn, apply downward pressure on prices. They also remind that higher rates raise the cost of servicing public debt, leaving less money for other government priorities. [Source: Alicante Chamber reports]
Experts caution that the rise in rates alone is unlikely to threaten the sustainability of most companies. The real concern is how these increases interact with pandemic-era shocks, spikes in electricity and raw material costs, and today’s weaker demand outlook. In this view, a number of firms could struggle to stay afloat, risking ongoing viability if other pressures persist. [Source: economic think tank analyses]
State of the zombie companies
Special attention is given to the so-called zombie companies—those that have managed to survive recent years mainly due to exceptionally low interest rates and have now begun to falter. Ray Torres notes that these entities represent a small slice of the productive fabric, and the broad trend since the last crisis has been toward deleveraging. [Source: Funcas/Conjuntura commentary]
Less investment and its consequences
One notable consequence is a slowdown in new investment projects, which affects job creation. The picture could still vary by project profitability. If a project yields only around 10% returns, it may proceed more cautiously, especially among firms with tighter financial margins. Francisco Llopis, director of studies for the Alicante think tank Ineca, observes that profitability will steer decision-making in the near term. [Source: Ineca analyses]
Generally, it is argued that companies still have some margin to absorb higher financing costs, while households face a different dynamic. Core inflation indicators show that price increases are outpacing wage gains, placing more of the burden on finances. In this setting, borrowers face the greatest pressure. [Source: sectorial economic assessments]
Beyond rates, the employment picture will be crucial. Raymond Torres notes that if businesses survive the near term, households will adjust their spending and belt-tightening will continue. The test will come in the autumn, when labor reforms and any new arrangements to replace ERTEs are evaluated for their effectiveness in sustaining incomes. [Source: economic forecast commentary]
Slower demand for primary residences
From the Provincial Association of Regulators, Provia, the expectation is that rate rises will have a limited effect on the sale of second homes, many of which are financed in cash or with minimal debt. The real challenge will come from permanent home purchases where mortgages are more common. A slowdown in such projects is anticipated as a result. [Source: Provia statements]
Hosbec’s Toni Mayor notes that rising wage costs across Europe may leave families with less disposable income for travel, potentially dampening tourist demand. Inflation-driven pressures have already begun to temper the previously brisk pace in the sector. [Source: tourism industry briefings]