Table of Contents
The eurozone faces the risk of a new debt crisis if it does not take immediate action to boost growth, reduce public debt and correct “political uncertainty”, the European Central Bank has warned. In its annual Financial Stability Review, published on Wednesday, the ECB sounded the alarm about a possible return of “market concerns about public debt sustainability”.
He pointed to “increased debt levels and high budget deficits”, as well as tepid growth and uncertainties caused by the recent “election results at European and national level, especially in France”.
The spread between French and German 10-year government bonds – a key indicator of investor concern – widened this month to 0.77 percentage points, close to a 12-year high hit before France’s snap election last year. summer.
“Headwinds to economic growth from factors such as low productivity make elevated debt levels and budget deficits more likely to reignite debt sustainability concerns,” the ECB warned on Wednesday.
Greek… memories and ECB
The Financial Times recalls that more than a decade ago, Greece avoided default after concerns about its financial stability triggered major market turmoil for the common currency. The situation was only smoothed over when then-ECB president Mario Draghi pledged to do “whatever it takes” to prevent the currency zone from collapsing.
The ECB said on Wednesday that sovereign credit risk premiums could rise even higher, pointing to “weak” fundamentals in many member states and maturing sovereign debt.
He added that the combination of low growth and high public debt in the 20-nation currency bloc could make it harder for governments to pay for higher defense needs and investment to fight climate change. change.
The ECB also warned that equity and bond markets were exposed to increasing risks of “sharp adjustments”, pointing to “high valuations and risk concentration” which had already led to “several sharp but short-lived bursts of volatility”.
He also said that in a potential economic downturn, bank balance sheets could also be hit, as consumers and companies in the eurozone are already being hit by higher interest rates.
The threat of higher losses on commercial real estate “could be material for individual banks and investment funds,” the ECB added.
The ECB’s warnings
- Economic growth remains fragile, while worries about the outlook for global trade add to geopolitical and political uncertainty
- High valuations and concentration of risk make markets more prone to sudden corrections
- Policy uncertainty, weak fiscal figures in some countries and subdued potential growth raise concerns about public debt sustainability
- Credit risk vulnerabilities in some euro area households and firms could weigh on asset quality for banks and non-bank financial intermediaries if downside risks to growth are confirmed
The European Central Bank (ECB) sees increased financial stability vulnerabilities in a volatile environment. Risks to eurozone economic growth have shifted to the downside as inflation nears 2%, while financial markets have experienced several sharp but short-lived bursts of volatility in recent months. “The outlook for financial stability is clouded by heightened macroeconomic and geopolitical uncertainty along with growing trade policy uncertainty,” ECB Vice President Luis de Guidos commented.
While financial markets have also proved resilient so far, there is no room for complacency. The underlying vulnerabilities make equity and corporate credit markets susceptible to further volatility. High valuations and risk concentration, especially in equity markets, increase the likelihood of sharp adjustments. Should adverse dynamics occur, non-banks could add to market pressures due to their liquidity weaknesses, in some cases combined with high leverage and concentrated exposures.
Worrying about debt
Despite a decline in the public debt-to-GDP ratio after rising during the pandemic, fiscal fundamentals remain weak in some euro area countries. The cost of servicing public debt is expected to continue to rise as maturing debt shifts with interest rates higher than those on outstanding debt. Elevated debt levels and high fiscal deficits, combined with weak long-term growth potential and policy uncertainty, increase the risk of fiscal slippage.
High borrowing costs and weak growth prospects continue to weigh on corporate balance sheets, with euro zone companies reporting a drop in profits due to high interest payments. The outlook for real estate markets is mixed, with residential property prices stabilizing, while commercial real estate markets remain under pressure due to challenges posed by telecommuting and e-commerce. Households, in contrast, are benefiting from a strong labor market and have strengthened their resilience by increasing savings and reducing debt.
Source: ot.gr
#ECB #Risk #debt #crisis #eurozone #warnings
How might recent election outcomes in European countries influence fiscal policy approaches, particularly concerning austerity measures versus growth-oriented strategies?
Hello, thank you for joining us today. As the European Central Bank (ECB) has warned of the risk of a new debt crisis in the eurozone, we would like to discuss this issue with you. Firstly, what are your thoughts on the ECB’s assessment of the current economic situation in the eurozone and the potential risks it faces in terms of public debt sustainability?
Secondly, with concerns about public debt and potential policy uncertainty in several European countries, especially following recent election results, how do you think governments should approach fiscal consolidation to ensure economic growth while managing their debt levels? Are austerity measures still relevant in this context?
Thirdly, the ECB has highlighted the risk of market corrections in equity and bond markets in the eurozone. How could these potential corrections affect investor confidence and the broader economy? Additionally, what role do you see for non-bank financial intermediaries in mitigating these risks and maintaining financial stability?
Fourthly, given the ongoing geopolitical and geopolitical tensions, as well as the slowing global economy, how can policymakers best navigate through these challenges to ensure the resilience of the eurozone financial system? Are there any government interventions or policy measures that could be considered?
And with the ECB’s focus on debt sustainability and the need for action to boost growth, how do you see the future of fiscal and monetary policy coordination in the eurozone? Do you think stronger coordination is needed to address these challenges effectively?
