Mirroring the magnitude of the crisis, vulnerabilities and sources of
risk have sprung widely from the euro area macro-financial environment.
While remaining uneven across both economic sectors and countries, the
breadth of vulnerabilities continues to relate predominantly to the
unusual amount of balance sheet adjustment necessary after the
widespread credit expansion that presaged the global financial crisis.
This applies most acutely to the government sector – with worsening
public finances a feature shared by virtually all advanced economies.
The non-financial private sector also faces some challenges, notably
from an ongoing macroeconomic slowdown, but with aggregate euro area
balance sheet positions that make it relatively more robust to weather
such forces. In parallel, financial markets exhibited heightened
volatility and, on occasion, even extreme turbulences, with sharp
adjustments characterising the latter half of 2011. In this environment,
financial stability in the euro area has faced strong headwinds. In
particular, four related and intertwined risks are key at present:
-
Contagion and negative feedback between the vulnerability of public finances, the financial sector and economic growth
-
Funding strains in the euro area banking sector
-
Weakening macroeconomic activity, credit risks for banks and
second-round effects through a reduced credit availability in the
economy
- Imbalances of key global economies and the risk of a sharp global economic slowdown
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