In an unexpected two-part warning from the ECB, the European Central Bank warned of ‘excessive exuberance’ in some European housing markets, driven by offshore buyers, that could spread to other areas in a ‘ripple effect.’ Separately, the ECB also said “debt-sustainability concerns” have risen in the past six months amid a potential increase in yields and political uncertainty in some countries.
We start with the latter warning, which we find ironic as it is a function of the ECB’s own policies of keeping rates suppressed at record lows to promote inflation, and now that inflation has finally emerged, the ECB is worried about the spillover and unwind of its policies. “Risks to financial stability stemming from financial markets remain significant,’ the ECB said in its Financial Stability Review. An abrupt bond-market repricing could ‘materialize via spillovers from higher yields in advanced economies, in particular the United States.’
The ECB also warned that euro-area banks remain vulnerable as low interest rates and a big stock of non-performing loans in some regions challenge profitability. It cited structural challenges in the industry, including overcapacity and too little income diversification.
This post was published at Zero Hedge on May 24, 2017.
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