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Thursday, December 7, 2023

The ECB warns States of a risk of financial crisis

The risk of a financial crisis in Europe is still there, according to the European Central Bank. Its president, Christine Lagarde, also head of the European Systemic Risk Committee (ESRB), notably warned this Thursday that if: “ so far, the European financial system has avoided the worst-case scenario in which serious systemic risks materialize at the same time (…) Policymakers must remain proactive and attentive to financial stability risks as they arise. that they arise. »

ECB: “No one can say where inflation will be in three months” (Christopher Dembik, Saxo Bank)

And for good reason, the European economic fabric is weakened at the end of 2023 following two years marked by inflation and the rise in key rates. As a reminder, with a view to curbing the rise in prices by slowing down economic activity, the guardian of the euro has increased its key rates ten times in a row since spring 2022 before taking a break in October to let its key rates between 4% and 4.75%, the highest since the creation of the euro in 1999.

“Inflation persists but it is decreasing” (Christine Lagarde, BCE)

A first warning in September 2022

Faced with this monetary tightening which has increased the cost of debt and penalized business activity, in September 2022 the CERS issued a warning to European finance without precedent for more than ten years. The committee then called on the banks to “ prepare ” Has ” extreme risk scenarios », made more likely since the outbreak of the war in Ukraine and the rapid reversal of the trend in interest rates in the face of inflation.

However, over the past year, the tremors in the global financial system have mainly occurred outside the eurozone, with the failure of regional banks in the United States, the sovereign bond crisis in the United Kingdom and, more recently, fluctuations in the price of U.S. Treasury bonds.

But the president of the institution calls for us not to let our guard down. In the medium term, however, the profitability of banks “ will be affected by the increase in financing costs, linked to the increase in key rates (of the ECB), and by a considerable drop in loan volumes », recalled Christine Lagarde this Thursday. Furthermore, the “ sustained combination of low growth and higher debt servicing costs will continue to strain vulnerable households and businesses, which could lead to increased lending » in arrears, according to the first guardian of the euro.

Finally, the list of “ hotspots » in the financial system « stays long “, she said, citing as an example money market funds and investment funds, particularly those invested in illiquid assets.

Lagarde suggests rates will stay high for a long time

Especially since the recession anticipated by many economists ultimately did not arrive and Europe escaped a financial crisis, the difficult times are not behind us, the ECB would like to remind us. And for good reason, if the governor of the Bank of France, François Villeroy de Galhau judged that the ECB’s interest rates were no longer going to increase, ” except shock ” And “ except surprise », Christine Lagarde affirmed on Friday, concerning an upcoming rate cut that: “cThis is not something that will happen in the next few quarters “.

Significant uncertainty, due in particular to the fact that not all those responsible for monetary policy in the euro zone are speaking the same way. Isabel Schnabel, member of the ECB executive board, asked last week not to “ close the door to a further rise » interest rates on the potentially unstable path to bringing inflation back to 2%. “After a long period of high inflation, inflation expectations are fragile and further supply-side shocks can destabilize them, threatening price stability in the medium term,” she said.

(With AFP)