FRANKFURT (Dow Jones)--Contagion from the euro zone's debt crisis remains the key risk to financial stability in the single currency bloc, the European Central Bank warned Wednesday, reiterating its opposition to a debt restructuring.
"Despite improving global and euro area economic and financial conditions, the overall outlook for financial stability has remained very challenging in the euro area," the ECB said in its semi-annual Financial Stability Review.
The risk of "adverse contagion" from the bloc's sovereign debt crisis, and its interplay with the financial sector, "arguably remains the most pressing concern", the central bank said.
European-level efforts to contain the debt crisis "have not been sufficient to overcome all difficulties", and European crisis management has been "fraught with some detrimental shortcomings," the ECB said.
Funding risks also remain "an Achilles heel for many euro area banks", particularly those in fiscally stressed countries, the ECB said.
But while the central bank said implementing Greece's fiscal reforms has grown more challenging since December, it warned that a debt restructuring could have "potentially very dangerous implications." Countries should focus instead on pushing through structural reforms, it said.
The ECB has repeatedly warned against any involuntary private creditor involvement in a second Greek aid package, putting it at odds with Germany, which has called for a bond swap.
ECB Governing Council member Mario Draghi said Tuesday that a second Greek rescue must exclude "all concepts that are not purely voluntary or that have any element of compulsion."
Still, the ECB said in its report that it sees "encouraging signs" that the debt crisis can be contained.
"The potential for contagion is limited by the particularly acute set of idiosyncratic country-specific vulnerabilities of the countries that have applied for EU/IMF assistance."
It highlighted "broad-based improvements" in the banking sector since December and a "continued normalization" in interbank markets.
The bank also praised its own non-standard monetary policy measures, saying its bond purchases and full allotment policy have "proven to be pivotal not only to maintain price stability but also to foster financial stability."
ECB President Jean-Claude Trichet said June 8 that the bank would continue to meet banks' full liquidity needs at the main refinancing operation at a fixed rate for as long as necessary and at least until mid-October.
The ECB reiterated that its non-standard measures are "temporary", and said their phasing-out might spark more interbank activity but could also pose a challenge for some banks in stressed euro-zone countries.
Other key risks to financial stability include potential losses from property price declines, an unexpected surge in long-term interest rates and asset bubbles in emerging markets, the ECB said.
Global financial and current account imbalances "are expected to widen further" in future as advanced economies face growing fiscal burdens, the bank added.
Source: http://online.wsj.com
"Despite improving global and euro area economic and financial conditions, the overall outlook for financial stability has remained very challenging in the euro area," the ECB said in its semi-annual Financial Stability Review.
The risk of "adverse contagion" from the bloc's sovereign debt crisis, and its interplay with the financial sector, "arguably remains the most pressing concern", the central bank said.
European-level efforts to contain the debt crisis "have not been sufficient to overcome all difficulties", and European crisis management has been "fraught with some detrimental shortcomings," the ECB said.
Funding risks also remain "an Achilles heel for many euro area banks", particularly those in fiscally stressed countries, the ECB said.
But while the central bank said implementing Greece's fiscal reforms has grown more challenging since December, it warned that a debt restructuring could have "potentially very dangerous implications." Countries should focus instead on pushing through structural reforms, it said.
The ECB has repeatedly warned against any involuntary private creditor involvement in a second Greek aid package, putting it at odds with Germany, which has called for a bond swap.
ECB Governing Council member Mario Draghi said Tuesday that a second Greek rescue must exclude "all concepts that are not purely voluntary or that have any element of compulsion."
Still, the ECB said in its report that it sees "encouraging signs" that the debt crisis can be contained.
"The potential for contagion is limited by the particularly acute set of idiosyncratic country-specific vulnerabilities of the countries that have applied for EU/IMF assistance."
It highlighted "broad-based improvements" in the banking sector since December and a "continued normalization" in interbank markets.
The bank also praised its own non-standard monetary policy measures, saying its bond purchases and full allotment policy have "proven to be pivotal not only to maintain price stability but also to foster financial stability."
ECB President Jean-Claude Trichet said June 8 that the bank would continue to meet banks' full liquidity needs at the main refinancing operation at a fixed rate for as long as necessary and at least until mid-October.
The ECB reiterated that its non-standard measures are "temporary", and said their phasing-out might spark more interbank activity but could also pose a challenge for some banks in stressed euro-zone countries.
Other key risks to financial stability include potential losses from property price declines, an unexpected surge in long-term interest rates and asset bubbles in emerging markets, the ECB said.
Global financial and current account imbalances "are expected to widen further" in future as advanced economies face growing fiscal burdens, the bank added.
Source: http://online.wsj.com
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