Global and European Financial Stability Risks

Tuesday, November 30, 2021 at 14:00-15:30 Vienna time (CET) 

Mr. Paul Hiebert, Directorate-General Macroprudential Policy and Financial Stability, European Central Bank Mr. Fabio Massimo Natalucci, Monetary and Capital Markets Departments, International Monetary Fund Ms. Julia Woerz, Foreign Research Division, Oesterreichsche Nationalbank

Mr. Reiner Martin, Joint Vienna Institute

At the fourth JVI Webinar on Global and European financial stability risks, Fabio Natalucci (IMF) and Paul Hiebert (ECB) provided key insights from the latest editions of the IMF’s Global Financial Stabilty Report (GFSR) and the ECB’s Financial Stability Review (FSR) respectively. In addition, Julia Woerz (OeNB) provided an account of recent developments in financial stability risks in Central, Eastern and Southeastern European EU countries.

Mr. Fabio Natalucci (IMF) stressed that financial stability risks have been contained so far, reflecting ongoing policy support and a rebound in the global economy earlier this year. Compared to the beginning of 2021, financial conditions have on balance eased further advanced economies while a number of central banks in emerging markets have tightened monetary policy this year. However, the optimism that propelled markets earlier in the year has faded on growing concerns about the strength of the global recovery, and ongoing supply chain disruptions intensified inflation concerns. Signs of stretched asset valuations in some market segments persist, and pockets of vulnerabilities remain in the nonbank financial sector; recovery is uneven in the corporate sector. Mr. Natalucci also briefly discussed the opportunities and challenges of the crypto ecosystem and how sustainable funds can support the global transition to a green economy.

Turning to developments in the euro area, Paul Hiebert (ECB) argued that the recent economic recovery in the euro area has brought a recovery in corporate activity that has reduced many of our worst fears about economic scarring and rising credit risk. Instead, risks of high rates of corporate defaults and bank losses are now significantly lower than six months ago. Across the euro area, reliance on policy support schemes has been shifting and a number of schemes have expired without creating disruption. But risks stemming from the pandemic have not disappeared entirely, not least because vaccination progress has remained slow in many areas of the world, while global supply chain pressures and rising energy prices pose new challenges to the strength of the recovery and the outlook for inflation. Pandemic-related losses are likely to continue materialising for some time, amid a legacy of higher debt. Meanwhile, a number of vulnerabilities have intensified. The markets for equity and risky assets have maintained their striking buoyancy, making them more susceptible to corrections. There have been examples of established market players exploring more novel and more exotic investments. In parallel, euro area housing markets have expanded rapidly, with little indication that lending standards are tightening in response.

Julia Woerz (OeNB) argued that there are mounting challenges in the Central, Eastern and South-East European EU countries. The region saw a strong economic rebound in 2021 but uncertainty is elevated among risks from pandemic developments and rising inflation. She argued that inflation is unlikely to soften soon as both, cost-push and demand-pull factors will remain in place for some time and inflation expectations are rising. Inflation targeting central banks in the region have thus started a decisive hiking cycle, although overall monetary policy conditions remain rather lose. Banking sectors in the CESEE countries remain in good conditions so far with credit growth picking up. The full impact of the pandemic-related recession is, however, not yet visible and in particular, non-financial corporations in CESEE are potentially vulnerable to rising interest rates. Inflation targeting central banks in the region are currently facing the challenge of keeping inflation expectations anchored, while ensuring a smooth transition toward a higher interest rate environment for debtors.

Reiner Martin, Lead Economist, JVI


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