Euribor deepens falls in July and returns to pre-pandemic levels

The 12-month Euribor is back to the way it was before the pandemic. The behavior of the index in July, month in which it has fallen sharply until it reached trading again below -0.3% in the daily rate, confirms without doubt that the sharp increases in March, April and May were the result of of a market totally disrupted by the outbreak of the coronavirus , which turned confidence in the interbank market upside down due to the high doses of uncertainty. Additional stimuli from the European Central Bank ( ECB) at the beginning of June they abruptly interrupted the escalation that had led to the most widely used index for calculating variable mortgages in Spain, which almost reached zero. Once bank tensions have eased, the Euribor continues its downward trend and closes July at -0.279% on average. This is the second lowest value so far this year, only surpassed by -0.288% in February. All in all, the mortgages with annual revision will rise very slightly, given that just a year ago the rate was slightly lower, at -0.283%.

Rui da Mota, an expert in equities in the area of ​​economic analysis and markets of International Financial Analysts (Afi) , argues that, after having risen sharply due to the impact of Covid-19, the Euribor has normalized its price to levels prior to the pandemic. "The fall in the Euribor reflects that the credit risk perceived by the pandemic no longer exists," he says. "There is a lot of liquidity and support from the central banks. The ECB is buying debt and the banks are making provisions and their capital levels are stable. It is a normalization of bank risk in full force," he points out.

The monetary proposal of the European Central Bank, which extended its special purchasing program against Covid-19 by 600,000 million euros to 1.35 trillion, has been the main responsible for the change in trend of the Euribor. Olivia Álvarez, analyst at Monex Europe in Spain , highlights that "the stress of the lenders was associated with the notable uncertainty regarding the evolution of the pandemic and the degree of support of public policies for the private sector. Crucially, the solid strengthening of the The ECB's ultra-accommodative position and the recent approval of the creation of a community debt market considerably relax the financing conditions in the eurozone, facilitating the continued decline of the Euribor. "

Joaquín Robles, analyst at XTB , indicates that the intention of central banks to keep interest rates low longer than expected is causing the Euribor falls. Added to this are other factors, such as the stabilization of markets in recent weeks, "restoring confidence to the interbank market, which had drastically reduced its activity during the start of the health crisis," says the expert.

Just before confinement in Spain, the Euribor marked -0.368% in daily rate. Shortly after, the incident started an upward trend that led it to end March at -0.266% on average compared to -0.288% in February. In April, it continued to rise to -0.108% and accelerated in May to -0.081%. To find a higher figure (or close to zero), it was necessary to go back to December 2016 (-0.08%). June broke the bullish streak of three consecutive months by falling to -0.147%.

In July, the Euribor chained its second consecutive fall and has reached -0.333% on the 31st. However, it will make mortgages more expensive for those with a revision with the data for July a year ago, although for the minimum. To a client with an average mortgage of 150,000 euros at 25 years with a 1% differential over the Euribor, the monthly payments will only go up a few cents or about 5 euros a year.

Disparate forecasts

Experts debate between further falls in the Euribor or possible rebounds if the pandemic becomes more complicated in the coming months. "This benchmark index is again close to the historical minimum values ​​at which it traded during the second half of 2019 and the first months of this year. However, this has been a year of continuous ups and downs for the Euribor," they point out from HelpMyCash. com , where they see "it is difficult for the index to suffer another aggressive rebound in the rest of the year". The director of Mortgages of iAhorro, Simone Colombelli , points out that "the ECB's program will last until 2021, which allows the Euribor to continue in negative for longer, although we do not believe that the historical low of August 2019 (-0.356%) ".

Monex Europe's forecasts suggest that the Euribor could continue to fall thanks to the extensive credit expansion programs launched by the ECB and the "solid" messages that its President, Christine Lagarde, has reiterated about the bank's willingness to relax financing conditions to overcome the Covid-19 crisis. However, Álvarez does not rule out that, depending on the evolution of the pandemic and given the growing prospect of new containment measures, the Euribor would pick up again towards the end of the year. "This scenario could once again strain liquidity conditions in the interbank market despite the support of the ECB, as fear of default due to possible business failure increases," he stresses.

For his part, Robles believes that the long-awaited economic recovery is not being as fast as investors discounted, as the markets are facing new outbreaks, trade tensions and a slower pace of activity. That is why he believes that stimulus programs and liquidity injections to banks will also continue for a long time. Thus, it estimates that the Euribor could record new historical lows in the coming months, below -0.36%. "Although economic prospects may improve, recovering activity levels prior to the health crisis may be slower than anticipated," says Robles.