Bank of Spain warns of indirect hit to economy, banks from Ukraine conflict

By Jesús Aguado

MADRID (Reuters) - Russia's invasion of Ukraine and the subsequent acceleration of inflation could have a significant indirect impact on the Spanish economy and banks, even though their direct exposure is very limited, the Bank of Spain said on Wednesday.

Spanish lenders in general rank among the less exposed to Russian credit, with the Spanish central bank estimating their credit risk at just above 700 million euros ($742 million).

However, the central bank said a potential combination of higher prices and higher interest rates in the short term could erode households' and companies' real income and hit sectors already heavily affected by the COVID-19 pandemic, such as tourism and transport.

"The indirect effects of the new shock, stemming from the impact on uncertainty, inflation and economic activity, can be significant," it said in its semi-annual financial stability report.

The persistence of recent inflation spikes, it added, increases the risks of second-round effects on wages and corporate margins. Galloping prices could also raise the cost of credit and banking provisions, it said.

Earlier this month, the Bank of Spain lowered its economic growth forecasts for 2022 and 2023, while raising its inflation outlook for this year to 7.5%.

Despite a spike in inflation in countries like Brazil and Turkey, Spanish banks' exposure to emerging markets is positive for financial margins, Angel Estrada, head of financial stability at the central bank, told reporters.

On Tuesday, shares in Santander fell 6.8% due to higher costs in Brazil stemming from increased inflation despite overall solid quarterly results.

Some analysts have highlighted risks from BBVA's bet on Turkey due to high prices.

The central bank also said the lifting of grace periods on state-backed loans, where companies are required to pay only interest and not the principal, could increase impairments on banks' credit portfolios in the coming quarters.

In its view, the Ukraine conflict may also hike public spending in the short run, while Spain's high deficit and public debt levels already make the economy vulnerable to deteriorating financing conditions.

($1 = 0.9439 euros)

(Reporting by Jesús Aguado Additional reporting by Emma Pinedo; Editing by Andrei Khalip and Mark Potter)