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The European Central Bank warns the Eurozone is at risk of another debt crisis if the bloc cannot boost growth, reduce public debt and overcome “policy instability”. .
In its annual Assess financial stabilityannounced on Wednesday, the ECB sounded the alarm about a possible return of “market concerns about the sustainability of sovereign debt”.
It points to “rising debt levels and high budget deficits” as well as tepid growth and uncertainties due to “recent election results at European and national levels, especially in France.”
The difference between French and German 10-year government bonds — a main measure among investor concerns — this month rose 0.77 percentage points, close to a 12-year high ahead of this summer’s congressional elections.
“Heads to economic growth from factors such as weak productivity, rising debt levels and budget deficits are likely to raise concerns about the sustainability of the economy,” the ECB warned on Wednesday. in debt”.
More than a decade ago, Greece narrowly avoided default after concerns about the country’s financial stability caused market turmoil for the common currency. This only subsided after then-ECB president Mario Draghi pledged to do “whatever is necessary” to prevent the currency zone from collapsing.
The ECB said on Wednesday that sovereign credit risk premiums could be pushed higher by macro-financial shocks, pointing to “weak” fundamentals in some member states and maturing government debt is “converted” at higher interest rates.
It added that the combination of low growth and high government debt across the 20-nation currency bloc could make it more difficult for governments to pay for defense needs and higher investment to fight climate change.
The ECB also warned that stock and bond markets were at increased risk of a “sharp correction”, pointing out that “high valuations and risk concentration” had led to “some but short-lived spikes in volatility”. in a short time”.
Amid a potential economic slowdown, bank balance sheets could also be affected as consumers and companies in the euro zone grapple with higher interest rates.
The threat of higher losses on commercial real estate “could be significant for individual banks and investment funds,” the ECB added.
