“Rising interest rates could present challenges for highly indebted companies and states,” said the European Central Bank in its semi-annual report on financial stability. (Photo: 123RF)
Frankfurt — The interest rate hikes looming over the next few months in the euro zone could pose a “challenge” for heavily indebted states and companies, the European Central Bank warned on Wednesday.
“Rising interest rates could present challenges for heavily indebted companies and states,” the institution said in its semi-annual report on financial stability.
With the key to higher “spreads”, measuring the closely watched gaps between the borrowing rates of various countries in the euro zone and those considered “safe” such as the German 10-year “Bund” loan, as well as between private borrowers, all of which could lead to “increasing financial fragmentation”.
After a decade of lower interest rates in the euro zone, the reversal of the cycle must occur in a context of a strong recovery in prices, aggravated by the war in Ukraine.
This conflict has already “increased risks to financial stability due to its impact on virtually all aspects of economic activity and financing conditions”, comments Luis de Guindos, Vice-President of the ECB, in the report.
This document cites a set of “vulnerabilities” already perceived before the Russian invasion of Ukraine, particularly concerning prices on the real estate market such as the declining profitability of banks.
And overall “the situation has worsened compared to that six months ago”, summed up Mr. de Guindos during a conference call.
In this context, too abrupt a rise in interest rates can carry “risks, in particular if the underlying growth dynamic is sluggish”, notes the document.
The end of easy money also presents the risk of an imbalance for the euro zone from the moment certain countries, particularly indebted, begin to worry investors and the markets.
Anti-fragmentation tool
“The sustainability of the debt of companies and governments” having accumulated a large stock of debt “may deteriorate” in the event of an increase in the costs of (re) financing, already warns the ECB.
With for all, the still fresh memory of the debt crisis which had paralyzed the European continent at the beginning of the 2010 decade.
The so-called sovereign rates have been stretched for Spain or Italy lately, but “the current situation is not comparable to that which we had in 2011 or 2012”, according to Mr. de Guindos.
Still, “we should be prepared to intervene as needed to neutralize any non-linear market response” in the form of financial fragmentation “that could arise from a rate hike,” Fabio Panetta, a member, said on Wednesday. of the executive board, during a speech in Frankfurt.
The Board of Governors is “open” to this question, but has not yet discussed “any concrete details” concerning this type of instrument, said Mr. de Guindos.
The ECB is expected to decide in June to stop its net debt purchases, which have so far helped to level the level of interest rates on the markets. It should then begin a cycle of key interest rate hikes in July, with the debate between central bankers therefore going to focus on the speed and scale to be given to this rise in the cost of money.