The ECB warns of the risk of business default in the face of "gloomier" economic prospects

The Vice President of the ECB, Luis de Guindos. / ecb

The agency insists on the risks for the financial stability of the cryptoactive boom

Clara Dawn

There is no turning back now. The European Central Bank (ECB) is once again preparing the ground to start raising interest rates next July. And this time it does so through its latest financial stability report, in which the monetary institution again warns that the outlook "has weakened as rising inflation and the war in Ukraine test the strength of recovery after the pandemic.

The agency's vice president, Luis de Guindos, was one of the first voices to speak out in favor of the rate hike being undertaken sooner rather than later. And this Wednesday he warns that the risks associated with the war and high inflation "have weakened the confidence of companies and consumers, who have just emerged from the strict restrictions imposed during the pandemic."

Guindos warns of the harsh impact that high energy prices are having on the recovery. And in the presentation of the report, he also speaks of "the high volatility" that has highlighted "some liquidity risks, especially in commodity derivative markets." However, in the ECB's view, the main threat to financial stability in the euro area comes from macroeconomic channels.

“This implies additional challenges for the most indebted companies, at a time when the fiscal space of the countries is very limited. Fiscal policy support may need to be more targeted now than during the pandemic,” Guindos says.

The words of the vice president of the ECB come at a time when the Spanish government must decide whether it will finally extend the 'anti-crisis plan' valid until June 30 and, if so, what measures it will extend or modify. Among the most debated, the aid of 20 cents per liter of fuel, which could already be limited to certain sectors most affected by the crisis, instead of reaching all citizens as now.

At this point, the financial stability report indicates that companies in the region "face challenges arising from rising input prices and a more somber economic outlook."

The ECB warns that this could increase the 'defaults' (defaults) of companies belonging to sectors that have not yet fully recovered from the pandemic and are once again the most damaged by the impact of the war. “Heavily indebted companies and those with lower credit ratings may have difficulties with the stricter financing conditions,” warns the institution chaired by Christine Lagarde.

Guide to not get lost in the panic of a 'cryptocrash'

Another of the great risks observed by the ECB in its latest report for the month of May is that of the collapse suffered by cryptocurrencies in recent weeks. The organization dedicates, in fact, an entire chapter to the risk to financial stability that they already perceive in this market, especially in the face of the "excessive leverage" of some funds in this asset class.

That is precisely the greatest risk to financial stability. And the ECB is taking direct aim at some platforms that allow investors to raise their exposure to crypto assets through leverage. For example, Binance offers to leverage up to a maximum of 125 times the initial investment. Others like Bybit or BitmeX allow it up to a maximum of 100 times. At the other extreme are platforms like eToro or Kraken, which only allow their investors to leverage up to a maximum of 2 and 5 times, respectively.

"The risk to financial stability could be amplified by the increasing options offered to investors by crypto-asset platforms to increase their exposure through leverage," the ECB warns. And he provides a revealing example. The Binance platform, the crypto brokerage giant, offers a maximum leverage of 125 times the initial investment. BitMEX and Bybit allow you to leverage up to 100 times.

The big problem is that retail investors hold a large part of this market. In fact, and according to the latest survey of consumer expectations prepared by the ECB, up to 10% of households in the euro zone have this type of asset. Most of them have an investment of less than 5,000 euros. Only 6% (those with higher purchasing power) claim to have invested more than 30,000 euros.

The ECB recalls that, despite the crypto boom in recent years, this market still weighs less than 1% of the global financial system. But he warns that its size is already seven times larger than it was before the pandemic, with the creation, every day, of 10 new virtual assets on average. "If the current trajectory of this ecosystem is maintained and financial institutions become involved in it, then they could pose a risk to financial stability," says the ECB.

Source link