November 27, 2022

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The European Central Bank warns of increasing risks of financial instability in the eurozone: "Technical recession is becoming more likely" |  Economy

The European Central Bank warns of increasing risks of financial instability in the eurozone: “Technical recession is becoming more likely” | Economy

The European Central Bank (ECB) sees rising risks that could put financial stability in the eurozone at risk. Inflation, rising interest rates, and economic slowdowns affect families, businesses, banks, and governments.

“People and businesses are already feeling the impact of higher inflation and slower economic activity,” said ECB Vice President Luis de Guindos. “We estimate that risks to financial stability have increased, while a technical recession (two consecutive quarters of economic contraction) in the euro area has become more likely.”

High energy prices particularly affect households in their investment portfolios. As a result, they see their purchasing power diminish and the risk increases that they will no longer be able to repay their loans. Companies are also seeing rising energy bills, as well as costs for raw materials and materials. If this situation continues, there is a risk of an increase in corporate defaults, especially in energy-intensive sectors.

Therefore, banks face higher credit losses in the medium term. While the banking sector has recently seen a return to profitability amid rising interest rates, there are emerging signs of deteriorating asset quality, which may require higher provisions.

Temporary and targeted support

Meanwhile, governments are trying to provide financial support to companies and households to mitigate the increase in energy prices. But due to the Corona pandemic, they are often already suffering from high government debt, which, along with less favorable financing conditions, can derail budgets. Therefore, support must be temporary and targeted.

According to Guindos, achieving “price stability” is now the central bank’s priority. In the medium term, it aims for an inflation rate of 2 percent in the euro area, while in October it was 10.4 percent on an annual basis. Russia’s invasion of Ukraine – which was a major cause of the sharp rise in energy prices – remains one of the main factors driving inflation.

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