The European Central Bank says risks to the stability of companies, banks and financial markets remain “elevated” due to the uneven impact of the pandemic on the economy, warning that the eventual removal of relief measures could lead to a surge in bankruptcies.
The ECB warned of “a clustering of risks in some sectors and countries,” with companies in the services sector hardest hit by the pandemic having taken on more debt, leaving them vulnerable to prolonged economic weakness.
“An increase in corporate insolvencies may impact households via employment prospects, so far prevented by policy support measures,” the central bank said in its twice-yearly financial stability review issued Wednesday.
The central bank said government relief policies should continue to support the recovery. But bank officials urged governments to move toward more targeted relief and watch for the trouble brewing in particularly hard hit sectors. Services business — restaurants, entertainment, travel, hotels, airlines — that depend on personal contact have been among the most severely damaged during the pandemic closures.
Thus far, pandemic relief by governments in the 19 countries that use the euro has helped hold down unemployment and prevent mass layoffs. It has also helped to avert bankruptcies by otherwise viable companies, which in turn has helped the banks that loaned those companies money. Nonetheless, bank profits remain weak. Banks are important to the eurozone economy because that is where most companies get their financing to operate, in contrast to the U.S. where companies rely more on borrowing in financial markets.
“As the euro area emerges from the third wave of the pandemic, risks to financial stability remain elevated and have become more unevenly distributed,” said ECB vice-president Luis de Guindos. “A higher corporate debt burden in countries with larger services sectors could increase pressure on governments and banks in these countries.”
De Guindos said support measures for businesses should gradually move from broad-based help to more targeted measures.
The eurozone economy shrank 0.6% in the first quarter, but economists are expecting renewed growth for the rest of this year as the pace of vaccinations picks up and more countries remove restrictions on face-to-face contact.