The risks to financial stability in the Eurozone have become higher due to the strong likelihood of economic deceleration over the near future.
The risks to financial stability in the Eurozone have become higher due to the strong likelihood of economic deceleration over the near future, which might make the most indebted countries even more vulnerable. The warning comes from the European Central Bank that stresses the high exposure of the portuguese banking system to sovereign debt.
“Banks’ holdings of domestic sovereign debt remain elevated or have even increased since early 2018 in some euro area countries, including Italy and Portugal. Despite some moderation in sovereign risk perceptions over the last few months, the capital positions of banks with sizeable holdings of fair-valued sovereign bonds remain vulnerable to sudden increases in sovereign risk premia”, the Financial Stability Review, published this Tuesday, reports.
This concern is also shared by the International Monetary Fund and by the European Commission. Both in Portugal and Italy, bond purchases have increased over the last years. More than 8% of assets held by the Portuguese banks are, in fact, Portuguese public debt relative to almost 1% in 2008. There is a crucial difference between Portugal and Italy, though. Portugal has benefited from a historically sharp drop in public debt interests both in primary and secondary markets.
The uncertainty over global economic growth has contributed to the increase in markets’ volatility, aggravated by trade frictions.
“Should downside risks to growth materialise, financing costs for vulnerable sovereigns are likely to increase and may unearth debt sustainability concerns. In addition to the high level of debt and large fiscal deficits, some countries could face rollover risks if market participants reassess sovereign risk.” the Review adds.
ECB does not specify which countries were being described as “vulnerable”, despite both Greece, Italy and Portugal presenting the three highest debt to GDP ratios in the Eurozone.