Eurozone on verge of debt crisis, European Central Bank alerts

Lower gross domestic product (GDP) growth, higher public debt and policy uncertainties could push the Eurozone toward another crisis, the European Central Bank (ECB) warned.

In its Financial Stability Review, the ECB warns that the Eurozone’s current debt levels are unsustainable and could trigger a new fiscal crisis. The report highlights concerns over soaring debt, high budget deficits, stagnant growth, and uncertainties following recent European and national elections.

A combination of low economic growth and high government debt across the 20-country Eurozone may undermine fund increased defense spending and investments to combat climate change, ECB remarked.

Bank points fiscal risks and market vulnerabilities

The ECB indicated sovereign credit risk premiums may rise through macro-financial shocks, referring to several EU states by their “weak structure” and their recent involvement in handing over maturing sovereign debt at higher rates.

Additionally, pointing to “high valuations and risk concentration” that have already triggered “several pronounced but short-lived spikes in volatility,” the ECB stood out the vulnerability of stock and bond markets to rising risks of “sharp adjustments.”

The ECB also cautioned that an economic downturn could strain bank balance sheets, as Eurozone consumers and companies are already grappling with higher interest rates, posing the possibility of “significant” losses in commercial real estate, particularly for individual banks and investment funds.