ECB is worried about the financial system, is the next crisis coming?

European Central Bank (ECB) has had its hands full for years. Since then, one crisis has followed the next, and now there are fears that the combination of recession, high interest rates and political tensions could endanger the stability of the financial system.

This is what the ECB’s latest financial stability report suggests, as experts are concerned about various risks. These affect, among other things, the real estate sector. How dangerous the drug of cheap money can be can be seen from the Austrian real estate giant Signa. He shone with spectacular projects for many years and is now facing major financial problems.

High levels of debt increase the pressure

At a time when interest rates are rising significantly and the value of real estate is coming under pressure, this naturally leads to difficulties for companies with a high proportion of debt capital. Signa recently not only had to sell companies in its trading division, but also suffered a bankruptcy at Signa Sports United. Now the real estate sector has also come under massive pressure, and several prestige projects have been stopped mid-construction.

This also includes the Elbtower in Hamburg, whose construction was supposed to cost up to 950 million euros. The owners and investors are now looking for fresh money, but it remains to be seen whether this will be possible at the last minute. The ECB had already caused a stir months ago when it had Signa’s loans checked at European banks. All of the central bank’s worries at the time were apparently not unfounded, as is now evident.

Property ownership remains almost unaffordable

However, Signa’s problems could be just the beginning of a new crisis. High interest rates on loans, poor prospects for company orders and the after-effects of high inflation are putting a strain on private households and companies alike. They get into difficulties and are increasingly unable to service their liabilities.

The example of Bitcoin also shows how sensitively the markets react to economic news. Its price has more than doubled within a year, and there is currently optimism here.

The high loan interest rates are slowing down the economy, and the conflicts in Ukraine and Gaza could cause the energy markets to falter again. Where the crises are felt most clearly, there is a lull. Fewer and fewer people can afford to own real estate. Although prices have fallen recently, loan interest rates remain high. At the same time, demand for commercial real estate is falling because the topic of working from home is still current and is likely to remain so.

High national debt poses the risk of a rise in interest rates on bonds

The states continue to have high levels of debt, and the budget deficits do not suggest that this will change any time soon. Unless there is a reassessment of country risks, the situation will remain tense, but that could change quickly. The ECB believes that the banks still appear to be shock-resistant, but if the economic environment changes, the banks’ assets will also lose quality. They are already granting less credit, which is putting their profitability under pressure.

Unknown size shadow banks

The monetary authorities are also worried about the so-called shadow banks. These usually have a low liquidity buffer, which could trigger a sudden need if the economy is poor. The bottom line is that the ECB sees the need for great attention in order to quickly identify undesirable developments in the financial system.