Soaring interest rates: A concern for immigrants in Spain

The global credit crisis has claimed yet another set of victims – the low-skill immigrants owning a house in Spain. Ironically, many of them were drawn into the country by the then booming construction sector. But, as mortgage rates soar and Spanish economy experiences a slowdown, a large number of immigrants find themselves in a tight spot.

Majority of these immigrants, almost 80% of them, have migrated during the last ten years, a period of boom for the Spanish economy. A large number of immigrants, about 600,000, were drawn by the thriving construction and services sector. While this immigrant population, which comprises 11% of the total population, helped to sustain the growth in housing demand and prices, they pose a potential threat of large scale default in mortgage loans, in case of a rate hike, akin to the subprime collapse in the US.

As estimated by Bloomberg, the migrants in Spain borrowed Euro172 billion between 2005 and 2007. Moreover, at the peak of the housing sector boom, borrowing money was made easy by banks and thus, purchasing properties that people could not otherwise afford became easier. During the first half of 2007, homes purchased by immigrants exceeded one-third of the total figure. It was all very fine for the individuals and the economy, but only till the onset of the global credit shortage pushed up the interest rates. The house prices soon suffered a fall, as expectation of an increase in central bank rates pushed the Euribor rate to a record 5.44%. Some reports submitted by renowned ins t i tut ions reveal that approximately 90% of working-class immigrants in the country are now striving hard to repay the housing loans. The banks permit every member of the family to sign as guarantors for the loan borrowed. Thus, the immigrant families have become victims of the crisis, as every member struggles to meet mortgage requirements.

As if that was not enough, the economy started facing a slowdown, and the immigrants became its first casualty, in terms of job losses. The Spanish economy, ranked the eighth largest in the world and the fifth largest in Europe, witnessed a GDP growth of 3.8% in 2007 (at $1.362 trillion). The growth rate is expected to fall to 2.3% this year and Spain's Finance Minister Pedro Solbes has forecast a growth of 1% for 2009.

With unemployment becoming a major concern, companies have started dismissing immigrants. Infact, unemployment among immigrants has increased by 50% over the past few years.

According to the European Union immigration accord signed in July 2008 by Spanish premier Jose Luis Rodriguez Zapatero, the member states have pledged to expel illegal immigrants and deny them residency permits. The Spanish Government is also planning to permit immigrants claim jobless benefits in a lump sum on their return to their home countries.

All these adverse trends, if sustained, may impact the fast growth in remittance outflow from Spain in the near future, affecting both the recipient countries as well as the money transfer operators operating in the segment.