Biggest Growth red loans banks in Italy, Portugal, Greece and Cyprus may face inflation and rising interest rates. This warning was issued yesterday by the ECB, which in a new report indicates that inflation and rising interest rates are affecting household incomes, especially in the countries of the European South. As he points out, in the countries of the European South, households with lower incomes and high costs of servicing their debt and limited savings represent a larger percentage of loans.

The risk is greater for banks in Italy, Portugal, Greece and Cyprus.

With inflation rising in double digits, households are eating away at their savings while there is no room for income growth, especially in poorer countries that are disproportionately hurt by rising food and fuel prices. As the bank states in its financial stability report, “the estimated impact on banks’ asset quality from the end of 2022 is significant.” The problem is almost entirely attributable to low-income households, as a 10% increase in the basic cost of living would reduce their purchasing power by 20%, compared to a decrease of only 5% for middle-income households. The ECB says the disproportionate impact on low-income households could, in turn, significantly limit their ability to withstand shocks and provide cushions. However, the problem is not expected to become systemic, as the lowest-income families account for only 13% of household bank debt in the eurozone, while 70% are for higher-income households.

Rising consumer prices and interest rates in 2022 disproportionately affected low-income households. Low-income households spend a much larger share of their income on basic needs, especially energy and food. With both components hit particularly hard by inflation in 2022, the ECB said low-income households are more vulnerable. However, the impact of higher interest rates in the short term is less critical, as most existing lending is at fixed rates. However, in the medium to long term, they will have a much larger impact in the form of higher mortgage rates.