Corporate defaults main risk to economic stability

  • Lusa
  • 24 June 2022

The Bank of Portugal said on Friday that the increased probability of corporate default is one of the main risks to financial stability.

The Bank of Portugal (BoP) highlighted on Friday the increased probability of corporate default, due to the macroeconomic environment with inflationary pressures, as one of the main risks to financial stability.

According to the Financial Stability Report, released by the banking regulator, one of the main risks to financial stability relates to the “increased likelihood of corporate default, reflecting the combined effect of the financial vulnerability of some companies, the incomplete recovery of activity and profitability of some sectors in the post-pandemic period, as well as the current macroeconomic and financial environment.

The institution led by Mário Centeno also pointed to “a reduction in prices in the residential real estate market, arising from changes in financing conditions”, as well as the risk that the “general government debt ratio as a percentage of GDP [Gross Domestic Product] will not continue the expected path of reduction, due to uncertainty about economic activity and the increase in financing costs”.

Regarding the interest rate increase, in the coming years, this should translate into an “improvement in banks’ net interest income and an increase in recognition of impairments and potential losses arising from the devaluation of debt securities at fair value”.