The European Central Bank (ECB) warns of risks from an "exuberance" on the financial markets in the course of the recovery of the euro area economy from the corona pandemic.

Luis de Guindos, the vice president of the central bank, took up the words of former US Federal Reserve President Alan Greenspan on Wednesday, who had chosen the phrase “irrational exuberance” for the dot-com bubble in the 1990s.

Christian Siedenbiedel

Editor in business.

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De Guindos described the risk that after a long period of corona-related paralysis of the economy, the financial markets would now tend to exaggerate during the recovery and thus become more prone to setbacks.

De Guindos said that he would not yet describe what is currently being observed on the financial markets, but also on the markets for residential real estate, as "irrational".

But a certain "exuberance" can already be observed.

Increased risks in the real estate market

In its latest Financial Stability Report, the ECB describes in detail the risks that could arise especially in such phases of the economy returning from a temporary closure. “The message we have is bittersweet, as it were,” said de Guindos. On the one hand, bank loan defaults as a result of the crisis are significantly lower than even optimistic forecasters had expected: "The risk of high corporate default rates and bank losses is significantly lower today than it was six months ago." Bank profits are also already developing The forecast for the average return on equity of banks in the euro area for the full year 2021 has been raised from 4.2 to 7.2 percent compared to the May estimate."Bank profitability is returning to the level of the pre-crisis period," emphasized de Guindos.

On the other hand, the recent good development has increased the risk of painful setbacks.

For example, the ECB pointed to the increasing risks in residential real estate.

Contrary to what might have been expected, the prices for houses and apartments continued to rise sharply during the pandemic.

With an increase across the entire euro zone by an average of 7.3 percent compared to the previous year, the price increase this year is even particularly high.

It is the strongest price increase for the euro zone since 2005. In particular in countries where valuations were already high before the pandemic, the risks have worsened.

This market has become "more susceptible to a correction".

Stock market prone to corrections

At the same time, the central bank emphasizes that mutual funds, insurers and pension funds could suffer “significant credit losses” if the situation for lower-rated corporate bonds deteriorates. “The markets for stocks and riskier assets have maintained their marked rises, making them more susceptible to corrections,” said de Guindos. “There are examples of incumbents exploring newer and more exotic investments. In parallel, housing markets in the euro area have grown rapidly and there is little evidence that lending standards have been tightened in response. "

The uncertainties outside Europe include a slowdown in China, even if the troubles of indebted real estate developer China Evergrande Group have had limited impact on the outlook so far, according to the report.

How the central bank will react to all this in terms of monetary policy will be decided in December, said de Guindos.

The ECB Vice President went on to say that the supply bottlenecks for many intermediate products, which are a result of the economic recovery, are likely to last longer than initially expected.

Like rising energy prices, this could have an impact on inflation and economic growth in the euro area.

The central bank is therefore observing very carefully whether a wage-price spiral is developing as a result of the increased raw material prices and the supply bottlenecks.

"We haven't seen much here so far," said de Guindos, "but we have to follow this closely."

The inflation rate in the euro zone rose above the 4 percent mark in August, the European statistical office Eurostat confirmed a corresponding first estimate on Wednesday.

Consumer prices increased by 4.1 percent compared to the same month last year.

That was the highest inflation rate since July 2008.