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Rising debt levels of eurozone governments and companies have made it more likely that the economic aftershocks of the coronavirus pandemic could trigger financial instability, the European Central Bank has warned.
Although the economic outlook has been brightened recently due to falling infection rates and accelerating vaccinations, the ECB said its fortnightly periodicity on Wednesday financial stability review that the blog was still far from safe.
“We are optimistic that financial and economic conditions will recover,” said Luis de Guindos, vice-president of the ECB. “There is, however, a reality that the pandemic will leave a legacy of higher debts and weaker balance sheets, which, if left untreated, can lead to strong market corrections and financial stress or lead to a prolonged period of weak economic recovery. “.
The aggregate debt of euro area governments went from 86% of gross domestic product in 2019 to 100% last year, the ECB said, although it noted that this was mitigated by low interest rates. current interest rates, which reduced the cost of debt financing. Sovereign debt levels it will remain high next year, when more than half of the 19 eurozone countries will still have budget deficits in excess of 3% of GDP, according to ECB forecasts.
“Vulnerabilities in outstanding debt appear to outweigh the consequences of the global financial crisis and the euro area sovereign debt crisis, although the risks of service and debt renewal appear to be more benign. , given the favorable sovereignist financing conditions both in terms of prices and duration, ”he said.
De Guindos said the ECB would continue to maintain “favorable financing conditions” for governments, businesses and households and that any withdrawal of the stimulus of monetary policy “must be gradual, must be very prudent” and in line with the economic recovery.
But he warned that once the eurozone economy returned to its pre-pandemic level of production – which the ECB expects to occur in the middle of next year – it is very important for governments to come up with fiscal consolidation plans. be credible ”to reduce debt levels.
Government loan guarantees and implicit support for large companies, such as airlines, could further increase domestic debt levels, the ECB said, warning of a “sovereign-corporate banking nexus.” He said public sector loan guarantees were potentially worth about 14% of GDP, but so far the use of these guarantees was worth 4% of GDP.
Rising corporate debt levels had been the highest of the most leveraged companies, the ECB said. 90th percentile debt companies have increased their debt-to-equity ratios from 220% before the pandemic to more than 270% late last year.
The number of companies going bankrupt in the eurozone it fell one-fifth last year, despite the record post-war recession. De Guindos said bankruptcies would increase this year, but the scale of any increase would depend on how quickly government support is withdrawn.
He commercial real estate market has been affected by a shift towards remote work and online shopping during the pandemic, and the ECB said real estate price falls are likely to accelerate, posing a threat to banks. the euro area, as this sector accounts for 7% of its private sector lending.
Noting that equity markets “had exhibited remarkable exuberance” even after the sell-off in US bond markets that began earlier this year, the ECB said that “significant volatility in the prices raises questions about transparency and the degree of leverage in financial markets. “
The central bank also said it recently increased the bitcoin price had “eclipsed earlier financial bubbles such as the ‘tulip mania’ and the South Sea bubble in the 1600s and 1700s.” But while he called the cryptocurrency “risky and speculative,” he concluded that its “financial stability risks appear to be currently limited.”
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