ECB warns of threats to eurozone’s financial stability

THE Eurozone is facing multiple threats to its financial stability, the European Central Bank (ECB) has warned, as a recession looms and inflation surges.

The central bank said that banks, governments and households are all at risk as the economic outlook darkens.

The cost of living crisis is hurting people’s ability to service debts, while Europe’s worsening growth prospects threaten corporate profits.

It also warned about dangers to public finances as governments borrow to lessen the impact of the energy crisis, house price growth begins to stall and stock markets slide.

In its twice-yearly financial stability report, the central bank added: “All of these vulnerabilities could unfold simultaneously, potentially reinforcing one another.” Luis de Guindos, vicepresident of the ECB, said: “People and firms are already feeling the impact of rising inflation and the slowdown in economic activity.”

The ECB called for lenders to set aside more money for bad loans and urged global investment funds to hold more liquid assets. It said that chaos in UK gilt markets earlier this year and a cash crunch that hit European energy traders following Russia’s invasion of Ukraine highlighted how Europe’s financial system is increasingly vulnerable to wild market swings. These can trigger wider crises, it said.

The report said: “During the March 2020 market turmoil, and more recently following sharp moves in the UK sovereign debt market, such adverse dynamics were only averted by extraordinary central bank interventions.

“This illustrates the need to tackle risks related to leverage and enhance liquidity positions and preparedness across the [non-banking financial sector].”