The European Central Bank (ECB) warns that the risks to financial stability in the euro area have increased significantly over the past six months.

In its financial stability report presented on Wednesday, the central bank named three factors in particular that posed new risks for the financial system: high inflation, the downturn – and the less favorable financing conditions for companies, states and households due to rising interest rates.

Christian Siedenbiedel

Editor in Business.

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ECB Vice President Luis de Guindos admitted when presenting the semi-annual report that it was "not very optimistic".

He made it clear that the ECB also sees new financial risks as a result of the interest rate turnaround it has promoted itself;

nevertheless, the central bank will give priority to its goal of price stability over all other considerations.

After all, it is "very difficult to have financial stability without price stability".

The central bank took a closer look at several parts of the euro area economy.

Among other things, she has analyzed what happens to the real estate market in times of high inflation, downturns and rising interest rates;

what the development means for the highly indebted countries - and what effects it has on the financial sector.

Fewer want to buy a house

The central bank comes to a rather skeptical assessment of the real estate markets.

"There are signs that the real estate expansion of recent years may be coming to an end," it said.

Surveys show that the intention of buying a house has decreased significantly in the population as interest rates have risen.

With regard to the effects of inflation on the disposable income of potential borrowers, there are considerable differences depending on the income group.

The expected effects for the lower earners are significantly stronger because they spend a higher proportion of their income on the products that have become more expensive.

Financing conditions also tightened in commercial real estate markets, which could reverse the post-pandemic recovery, the ECB warned.

For the states, the central bank found that the large aid packages of the Corona period had put a strain on the financial situation of many countries.

According to estimates, governments have now spent another 1.4 percent of economic output to cushion the effects of the energy shock.

The central bankers warned that "most of these measures are not targeted".

They reiterated the advice that aid should be temporary and targeted to those most in need.

Inflation is likely to remain in double digits

"The increase in interest rates is weighing more heavily on the budget than previously assumed," the report says.

"Therefore, further deterioration in the financial environment could change market sentiment towards some of the euro area's more vulnerable sovereign issuers." De Guindos said that the days of "whatever it takes" for fiscal policy are over - alluding to the words of former ECB President Mario Draghi, who had said that monetary policy would do "whatever it takes" to save the euro.

The ECB reports that banks will initially benefit from rising interest rates in the form of higher margins.

As a result, bank stocks have outperformed the market as a whole.

At the same time, the banks should not forget that in this phase of the economic cycle there is a parallel increase in the risks for their assets, i.e. their assets.

This could have negative effects in the medium term.

The ECB also counts tensions in the financial markets among the risks to financial stability, which could test the resilience of funds, for example.

Many mutual funds remain highly vulnerable to valuation and credit losses.

Funds with particularly small buffers could significantly increase cash outflows.

When asked about the crypto crash, de Guindos said that the previous impression was that this development was limited to the crypto sector.

In any case, so far there have been no signs that this crisis will spread to the financial sector as a whole.

Nevertheless, one will “observe carefully”.

In a television interview with Bloomberg TV after the press conference, the ECB Vice President stated that he expected the inflation rate in the euro area to remain above 10 percent in the coming months.

Most recently, it was 10.7 percent in October.

"In the past we had a lot of negative surprises," said de Guindos: "Let's see what happens in November."