The debt problems of Euro zone countries continue to cause concern for central bankers across the globe. On Friday, Spain lost its AAA credit rating. And late yesterday the European Central Bank warned that banks on the continent have more write-downs coming. In the ECB's Financial Stability Report, debt is a central theme--public debt, household debt, and the impact of financial and non-financial institutions going into bankruptcy. And while President Obama and others have raised concern over the potentially dangerous effect of EU problems as a contagion on global markets, the ECB is stressing risks from one Euro zone country to another. From ECB Vice President Lucas Papademos's speech last night introducing the report:
A main risk to the euro area financial stability is the possibility that concerns about the sustainability of the public finances persist, or even increase, with an associated crowding out of private investment (slide 5). The progressive intensification of market concerns about sovereign credit risks among industrialised economies in the early months of 2010 opened up a number of hazardous contagion channels and adverse feedback loops between financial systems and public finances, in particular in the euro area.
The main reason for the severe deterioration of public finances was the activation of automatic stabilisers as a result of the marked contraction of economic activity which followed the collapse of Lehman Brothers. At the same time, because the structural fiscal deficits of a number of euro area countries were sizeable before the financial crisis erupted, fiscal deficits in those countries rose to very high levels. Added to this were the discretionary fiscal measures taken by many countries to stimulate their economies, following the adoption in December 2008 of the European Economic Recovery Plan.
By early May this year, adverse market dynamics had taken hold across a range of asset markets in an environment of diminishing market liquidity. Ultimately, the functioning of some markets, such as the government bond markets in countries with a very negative fiscal outlook, became impaired, thereby triggering a significant widening of government bond yield spreads in these countries, as shown on Chart 1 on slide 5.
Here's the chart referenced:
Read the full report here.
Posted
06-01-2010 6:24 AM
by
Graham Griffith
Filed under: global business, debt, global economic crisis, Europe, European economies, Euro Zone, Greece, Spain, sovereign debt, debt crisis, global contagions, public finances, bond ratings, european central bank, lucas papademos