May 2021 financial stability report
A sign of the Eurosystem’s monetary authority can be found outside the headquarters of the European Central Bank.
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LONDON – The 19 countries that share the euro face high and uneven financial risks, the European Central Bank warned on Wednesday, and a more targeted stimulus may be needed as the region recovers from the coronavirus crisis.
The pandemic has hit different economic sectors with varying degrees of severity and speed, with tourism and hospitality among the hardest hit. In its latest Financial Stability Review, the ECB warned that this uneven shock concentrates risks in very specific countries and parts of the eurozone economy.
“As the euro zone emerges from the third wave of the pandemic, the risks to financial stability remain high and have become more unevenly distributed,” ECB Vice-President Luis de Guindos said on Wednesday.
The eurozone central bank is particularly concerned about an increase in the corporate debt burden in countries with larger service sectors, as this could increase pressure on governments and lenders in those countries.
This could be a headache in the short term as governments step up their pandemic-related stimulus measures, such as leave programs.
“As this support is being phased out, insolvency rates considerably higher than before the pandemic cannot be ruled out, particularly in some euro area countries,” the ECB said in a statement.
“Broad political support, especially for business, could gradually shift from broad base to greater targeting,” de Guindos suggested.
Another risk on the ECB’s radar is the recent surge in US benchmark bond yields. This has already led the central bank to step up its purchases of government bonds in recent weeks, but the Frankfurt-based institution still fears that rising borrowing costs across the Atlantic will affect businesses, households and others. the indebted countries of the euro zone.
ECB President Christine Lagarde said at a press conference in March: “We do not control the yield curve”.
However, the ECB is seeking to avoid a premature rise in borrowing costs for eurozone governments. This could derail the economic recovery in 2021, after the region’s gross domestic product contracted by nearly 7% in 2020.
In addition, the ECB also warned on Wednesday that the profitability of eurozone banks is still “weak” and that lenders may be forced to strengthen their provisions in the future.
“Bank profitability remains low, while the outlook for loan demand is uncertain. The quality of bank assets has been preserved so far, but credit risk may materialize with a lag, implying a need to provisions for increased loan losses, “the ECB said in a statement.