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European Central Bank warns of insolvencies when pandemic stimulus measures are lifted

A Eurosystem monetary authority sign stands outside the European Central Bank headquarters.

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LONDON — The 19 nations that share the euro are facing financial risks that are elevated and uneven, the European Central Bank warned Wednesday, and more targeted stimulus could be required 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 hospitability among the most impacted. In its latest financial stability review, the ECB warned that this uneven shock is concentrating risks in very specific nations and parts of the euro zone economy.

“As the euro area emerges from the third wave of the pandemic, risks to financial stability remain elevated and have become more unevenly distributed,” ECB Vice President Luis de Guindos said in a statement Wednesday.

The euro zone’s central bank is particularly concerned about a higher corporate debt burden in countries with larger services sectors, because this could increase pressure on governments and lenders in these nations.

This could be a headache in the short term as governments lift their pandemic-related stimulus, such as furlough programs.

“As this support is gradually removed, considerably higher insolvency rates than before the pandemic cannot be ruled out, especially in certain euro area countries,” the ECB said in a statement.

“Extensive policy support, particularly for corporates, could gradually move from being broad-based to more targeted,” de Guindos suggested.

Another risk on the ECB’s radar is the recent surge in U.S. benchmark bond yields. This has already led the central bank to step up its government bond purchases in recent weeks, but the Frankfurt-based institution is still concerned that higher borrowing costs across the Atlantic will affect indebted corporates, households and nations in the euro area.

ECB President Christine Lagarde said at a press conference in March: “We are not doing yield curve control.”

However, the ECB is looking to avoid a premature rise in borrowing costs for euro area governments. This could derail the economic recovery in 2021, after the region’s gross domestic product contracted by almost 7% in 2020.

In addition, the ECB also warned Wednesday that bank profitability in the euro area is still “weak” and lenders might be forced to step up their provisions going forward.

“Bank profitability remains weak, while prospects for lending demand are uncertain. Bank asset quality has been preserved so far, but credit risk may materialise with a lag, implying a need for increased loan loss provisions,” the ECB said in a statement.

 

 


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