THE financial stability in the euro zone has strengthened thanks to the improvement of the economic outlook, with inflation steadily decreasing and with investor confidence recovering, according to the Financial Stability report published today by European Central Bank.

However, the ECB assesses that the outlook remains fragile, as the scope for economic and financial disruption is high in an environment of heightened geopolitical risks and global political uncertainty.

“Geopolitical risks continue to cloud the outlook for financial stability“, said ECB Vice-President Luis de Guidos. “While financial stability conditions have improved as a result of reduced recession risk and lower inflation, it remains vital to further strengthen the resilience of the financial system in light of global economic and geopolitical uncertainty,” he said during the presentation of the Report. .

Financial markets remain vulnerable to a future shock. While expectations of monetary policy easing are fueling optimism in investors’ risk assessments, the mood can change quickly, the ECB points out.

The Report also finds that the tight financial conditions they continue to test a team’s resilience vulnerable countries of the euro area, households, businesses and governments. Overall, however, the debt ratios to the GDP of euro area households and businesses have reduced below pre-pandemic levels, helping to ease debt sustainability concerns.

At the same time, public debt is expected to stabilize at levels higher than before the pandemic, making public finances more vulnerable to adverse shocks. More generally, servicing costs may continue to rise in the future as maturities continue to reprice at prevailing, significantly higher interest rates.

At the same time, the downturn in the real estate market. In particular, the commercial sector continues to experience a significant reduction in prices, their further decline cannot be ruled out.

In contrast, housing markets are showing some signs of stabilization after a so far smooth price correction.

Eurozone banks remained resilient, but low bank valuations suggest investors are concerned about the longevity of banks’ profitability. Challenges for euro area banks can arise from three sources. First, concerns about banks’ asset quality are growing, given signs of mounting losses in some loan portfolios that are more sensitive to cyclical downturns, notably commercial real estate.

Second, bank funding costs look set to remain high even if interest rates begin to decline. And third, bank earnings may weaken as operating income weakens due to still subdued loan growth and smaller floating rate loan income coming through.