Despite the recent calm, the European Central Bank publishes a worried report on the risks for the financial markets.
by Eric Albert (London, Correspondence)
After a catastrophic year, the financial markets have rebounded for a little over a month. The CAC 40 has resumed 17 % since early October, finding its level of three months ago, the euro won 8 % against the dollar over the same period, again above parity (at 1.03 ) and the rate of French bonds, which has risen to 3 %, fell to 2.6 %. But all of this may be a trompe-l’oeil, warns the European Central Bank on Wednesday, November 16 in its report on financial stability.
“We believe that the risks on financial stability have increased, while a technical recession in the euro zone has become more likely,” said Luis de Guindos, the vice-president of the ECB. Its warning is double.
The first concerns economic fragility. Inflation in the euro zone reaches 10.7 % (over one year), a record for the region, and, unlike the United States, it does not show signs of slowdown. This weakens household consumption and increases the risk of business bankruptcy, in particular those that are large energy consumers.
Until then, nothing new. Only, the ECB believes that the markets have not taken the actual measure of this upcoming recession. “For the moment, the drop in [markets] has only reflected the direct impact of the increase in interest rates, but perhaps not completely the situation that deteriorates.” Clearly, new decreases are possible, especially if inflation is more persistent than expected.
risks of dysfunction
The second warning of the ECB is more technical, but potentially more disturbing. It concerns the risks of market dysfunction, a sort of moment Lehman Brothers like the bankruptcy of the American bank in 2008, which had caused a global Krach.
Already, several upheavals have hit the headlines in recent months. The start of financial panic in the United Kingdom in September is cited as an example by the ECB. At the time, the British government had presented a large plan of unsuccessful tax cuts, logically provoking an increase in the British bond rate.
More unexpected, the hurricane has fallen part of the pension funds. They had derivative products exposing them to a too brutal increase in rates. In an emergency, they had to get out of liquidity to cover their losses, which had forced them to sell assets in panic, further accentuating the fall in the markets. Only the intervention of the Bank of England restored calm.
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