Jindos warns of the deterioration of financial stability in the euro area

The combination of a worsening economic outlook and tightening financing conditions due to interest rate hikes since July translates into A “significant deterioration” in financial stability in the eurozone. This Tuesday was warned by the “number two” of European Central Bank (ECB)Luis de Guindos, who insisted this Tuesday that it is very likely that the region will enter a mild technical recession between the last quarter of this year and the first of next year.

This burst of activity will happen in a context where Inflation will remain above 10%. – In the entity they expect it to continue around current levels in the coming months to moderate in the second quarter of 2023, although by then it will still be high, driven by energy -. “There is a significant deterioration in financial stability in the eurozone due to the deterioration of economic prospects and the tightening of financing conditions,” said the former Spanish Minister of Economy in his speech at the 13th Financial Meeting, organized by the companies ‘Expansión’ and KPMG. .

The ECB vice-president defended that the central bank’s best contribution would be to lower inflation, as the expected economic slowdown for the eurozone would not by itself be enough to bring the rate back to the medium-term target of 2%. . In this regard, Luis de Guindos emphasized this “The signal to follow is core inflation”which indicates the persistence of inflationary pressures, as the various interventions of national governments can distort the reading of general inflation data.

In this way, he insisted that the board of directors make its decisions based on available data and meeting by meeting, highlighting the importance of a fiscal policy that does not contradict monetary policy, as happened this fall in the United Kingdom, forcing the Bank of England to intervene.

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Higher interest rates may affect the solvency of the sector

With regard to the financial sector, the Vice-President of the European Central Bank confirmed that they are in a better position in terms of capital and liquidity compared to the previous crisis, with the only question being about profitability, although the recent rise in interest rates made this possible. to improve it. However, Guindos warned that the rise in rates would end up affecting families and businesses and this It will have an effect on solvencywhile the costs of liabilities, including deposits, will also end up increasing.

Likewise, it indicated that an inversion of the interest rate curve, higher in the short run than in the long run, may have an impact on the evolution of net profit margins, which is why I asked “Caution” We don’t get carried away in the short term. On the other hand, she warned again that the non-banking sector may focus on the main weakness of the European financial sector, especially in the case of high-risk investment funds, which concentrate most of the leverage. For this reason, he indicated that this sector is not subject to strict supervision like that of banks, and indicated the importance of providing it with a portfolio of macro-precautionary measures.

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