The increased “exuberance” in housing markets, the Junk bonds and the crypto assets have created vulnerabilities that will be exposed if higher-than-expected inflation causes a strong rise in interest rates, he warned European Central Bank (ECB).
The rebound in the eurozone economy this year after pandemic from coronavirus has reduced the short-term risks for the financial system, but it has also caused a longer term risk accumulationsaid the ECB this Wednesday in its semi-annual review of the financial stability.
“The concerns relate in particular to the pockets of exuberance in the credit, asset and housing markets, as well as the higher levels of indebtedness in the business and public sectors, “said the ECB.
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The increased inflation and the falling real interest rates have prompted investors to take greater risks in their search for profitability, which has left parts of the real estate markets, from debt and of crypto assets “increasingly susceptible to correction,” he warned.
“A markets correction could be caused by a weaker than expected economic recovery, by the effects of the adverse evolution of the economies of emerging markets, by a reintensioning of tensions in the non-financial corporate sector or by abrupt adjustments in market expectations with respect to the expected path of the normalization of monetary policy “, he pointed out.
The inflation of the eurozone reached its highest level in 13 years in October, 4.1%, well above the 2% target set by the ECB. However the central bank has predicted that inflation will fall back below its target in the coming years and said it did not expect to raise rates next year.
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However, on Wednesday he noted that there is “the risk that the recent tensions in global supply chains and the rise in energy prices will have more lasting effects on the economy. inflation than expected “.
The warning of the ECB has echoes of the way the former president of the Federal Reserve from USA, Alan Greenspan, described the dot-com bubble of the 1990s as “irrational exuberance.” Luis de Guindos, vice president of the ECB, told reporters not to think markets were irrational, but it said “it’s a risk” because the current low interest rate environment “won’t be there forever.”
The prices of the living place on the European Union rose 7.3% year-on-year in the second quarter, the largest rise since just before the financial crisis 2008. ECB He said there were “growing signs of overvaluation” leaving many European property markets “prone to correction” and warned of a “deterioration in lending standards.”
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He said these developments “reinforced the case” for national authorities to introduce more “macroprudential policy measures,” such as limits on bank loans or higher capital requirements for companies. mortgages.
The ECB said that “the more exotic market segments, such as crypto asset markets, they also remain subject to speculative outbreaks volatility. “He also expressed concern about the interrelationships between conventional financial markets and stablecoins, a kind of cryptocurrency It is nominally linked to underlying assets to limit price fluctuations.
The rapid growth in size and use of stablecoins “It requires the urgent application of regulatory, supervisory and surveillance frameworks,” he said.
The ECB noted that the non-bank financial sector “continues to face high credit risk” due to increased investments in “Junk bonds“riskier, whose rating is lower than investment grade. And he added:” If the returns of the bonds increase, valuation losses could trigger outflows from investment funds that, coupled with low liquidity buffers, could force bond funds to liquidate assets to satisfy investors’ repayments. “
The central bank said his own ultra-lax monetary policy, by virtue of which it cut interest rates to a negative level and bought trillion euros in bonds, had increased “the incentives to take more risks, which could become excessive and lead to the accumulation of systemic risk.”
However, he said that the main tools to deal with these risks were macroprudential rules rather than “leaning on the wind” tightening monetary policy more than necessary to achieve his goal of inflation.
Earlier this month, the United States Federal Reserve warned that the tensions in the Chinese real estate sector caused by the financial difficulties of the real estate group Evergrande, heavily in debt, “posed some risk to the US financial system.” But ECB He downplayed these concerns, saying, “So far, the impact on global growth projections and financial markets has been limited, as overseas exposure appears relatively small.”