Unemployment is the key driver for us in Spain. The recession in the Spanish economy has had a big impact in here, as our economy was extremely dependent on an oversized real estate sector. This, along with the broader difficulties affecting across Europe, has had a very negative effect on employment. Currently, the unemployment rate in Spain is about 20%, which is significantly higher than typical European levels.
As unemployment has risen, people have lost their capacity to repay debt. During the past two years the default rate for banks and financial institutions has grown to 5.5% in the third quarter of 2010, from a low of than 1% before the recession. This in turn has had two main effects:
There are now a lot of non-performing debts portfolios available for sale
Banks and financial institutions are reluctant to grant new credit
The credit crunch in particular has reinforced the negative cycle by damaging confidence levels. The Spanish consumer confidence index first reached a low and then improved, but has stabilised far below the levels we had in 2007. Currently, Spaniards show little interest in the future: having a job and a steady income stream right now is their main concern.
All this adds up to massive challenges from a collection perspective. First, unemployment has damaged people’s capacity to repay existing debt. In addition, banks and financial companies are unwilling to allow people to refinance outstanding debts. And finally, having little confidence in the future economy, debtors are very reluctant to repay their debts. The consequence of this is that amicable methods are currently less effective than legal collection - and debt collection companies have had to adapt to this.
For 2011, we expect a more stabilized macroeconomic environment with no major changes in payment behaviour or liquidation rates. However as soon as unemployment starts to be drop significantly, what we expect to happen in first half of 2012, we will see an significant increase in collections, especially in those situations where the creditors have a strong hand through legal action.
