Guindos foresees credit losses in banks due to the blow of inflation to households
Inflation at record highs in the euro zone, at 10.7% in October, and the “vertiginous” increase in gas and electricity bills are reducing the purchasing power of households and potentially reduce the ability to repay your loans. Their situation and that of more energy-intensive companies could leave banks facing “larger credit losses in the medium term”. The warning was made by the vice president of the European Central Bank, Luis de Guindos, at the presentation of the Financial Stability report published by the entity.
The issuer’s ‘number two’ remembers that the low-income families are the most affected due to the current situation, because a greater percentage of these are dedicated to paying energy bills and food. The record rise in the price of food products will continue to put pressure on citizens’ pockets in the medium term, according to experts. De Guindos, who has ensured that the banking system in the euro area is well placed to face many risks thanks to the reforms of the last decades, has also pointed to incipient signs of asset quality deterioration, which may require higher provisions.
This, despite the fact that the sector has recently experienced a recovery in profitability due to the increase in interest rates. Thus, and given the deterioration of the economic and financial perspectives, specific measures such as the capital mattresses they can help, in his opinion, to further strengthen the resilience of the financial system. It is, in fact, a message that the Bank of Spain has also had an impact on these days, which has asked national entities to make provisions “adequately and on time” given the greater risk that the country could enter a recession in the coming months – a scenario that, for the moment, other organizations such as the European Commission or the International Monetary Fund rule out.
The technical recession in the euro zone “is more likely”
The one who was Minister of Economy with Mariano Rajoy warns that risks to financial stability in the euro area have increased in the midst of the current situation. “Our assessment is that the risks to financial stability have increased, while a technical recession in the euro area has become more likely,” she insisted. All of these vulnerabilities could develop simultaneously, reinforcing each other. Taking all of the above into account, she believes that the uncertainty scenario facing the region will test the resilience of investment funds.
Many governments have provided fiscal support to businesses and households to mitigate the impact of rising energy prices. However, be aware that the high levels of public debt after the pandemic (that of the euro zone exceeded 12 trillion euros for the first time in the second quarter, the equivalent of 94.2% of GDP), together with stricter financing conditions, limit the scope of expansion measures that do not create risks for debt sustainability. For this reason, De Guindos emphasizes that Support must be temporary and aimed at those most affected.
Lastly, the vice-president of the ECB points out that the uncertainty surrounding the outlook for inflation and interest rates has raised the risk of a disorderly adjustment of asset prices in financial markets, despite recent fixes. At the same time, lower liquidity in some financial markets could pose challenges in adjusting portfolios or raising funds. It also increases the risk of unexpectedly large margin calls, which could exacerbate adverse market dynamics if funds are forced to sell assets to meet them.
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