ECB warns of increased risk of financial instability in eurozone: “Technical recession has become more likely” | Economy

“People and businesses are already feeling the impact of rising inflation and slowing 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, ed.) in the eurozone has become more likely.”

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

Banks therefore 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 deterioration in asset quality, which may require higher provisions.

Meanwhile, governments are trying to provide fiscal support to businesses and households to cushion the increase in energy prices. But due to the corona pandemic, they are often already struggling with high government debts, which, in combination with less favorable financing conditions, could derail budgets. The support must therefore be temporary and targeted.

According to the 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 eurozone, while in October it was 10.4 percent on an annual basis. The Russian invasion of Ukraine – largely the cause of the sharp rise in energy prices – remains one of the main factors driving inflation.