The war in Ukraine and ensuing acceleration of inflation may have a considerable indirect impact on Spain’s economy and banks, according to the Bank of Spain, despite limited direct exposure.

Generally speaking, Spanish lenders are among the less exposed to Russian credit, Reuters reports, with the Bank of Spain approximating their credit risk at just over €700 million.

Nevertheless, Spain’s central bank said the possible mix of elevated prices and higher interest rates over the short-term could impact real income and sectors already substantially affected by the pandemic, including tourism and transport.

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

Furthermore, the central bank went on to add that ongoing inflation hikes increase the risk of second-round effects on corporate margins and wages. Soaring prices could also raise credit and banking provisions costs.

The Bank of Spain reduced its economic growth forecasts earlier in April for this year and 2023 and increased its inflation outlook for 2022 to 7.5%.

However, the central bank’s head of financial stability, Angel Estrada said that despite inflation spikes in countries such as Turkey and Brazil, exposure by Spanish banks to emerging markets is positive in terms of financial margins.

Moreover, the Bank of Spain added that removing the grace period on state-backed loans could increase losses on credit portfolios in future quarters, the Reuters report adds.

The war in Ukraine could also increase public spending in the short-term, whilst Spain’s public debt levels and high deficit mean the economy is susceptible to worsening financial conditions.