The agency highlights the risks to the financial stability of the cryptoactive boom
There’s no going back now. The European Central Bank (ECB) is once again preparing the ground to start raising interest rates in July next year. And this time it does so through its latest report on financial stability, in which the monetary institution again warns that the outlook has “weakened as rising inflation and the war in Ukraine test the strength of the post-pandemic recovery.
The agency’s vice president, Luis de Guindos, was one of the first voices in favor of the rate hike sooner rather than later. And this Wednesday, he warned that the risks associated with the war and high inflation have “weakened the confidence of businesses and consumers, who have just emerged from the severe restrictions imposed during the pandemic”.
Guindos warns of the harsh impact of high energy prices on the recovery. And in presenting the report, he also speaks of “high volatility” which “has highlighted some liquidity risks, particularly in commodity derivatives markets”. However, according to the ECB, the biggest threat to financial stability in the euro area comes from macroeconomic channels.
“This poses additional challenges for the most indebted companies, at a time when countries’ fiscal space is very limited. Fiscal policy support may need to be more focused now than during the pandemic,” Guindos said.
The words of the ECB vice-president come at a time when the Spanish government must decide whether it will definitively extend the ‘anti-crisis plan’ valid until June 30 and, if so, what measures it will extend or change. One of the most discussed points is the support of 20 cents per liter of fuel, which could already be limited to certain sectors most affected by the crisis, instead of reaching all citizens as it is now.
At the moment, the financial stability report indicates that companies in the region “are facing challenges due to rising input prices and a bleak economic outlook.”
The ECB warns that this could increase the defaults of companies belonging to sectors that have not yet fully recovered from the pandemic and have again been hardest hit by the effects of the war. “Heavily indebted companies and companies with lower credit ratings may struggle with the tighter financing conditions,” warns the institution chaired by Christine Lagarde.
Another of the major risks noted by the ECB in its latest report for the month of May is the collapse of cryptocurrencies in recent weeks. In fact, the organization devotes an entire chapter to the risk to financial stability they already see in this market, especially given the “excessive leverage” of some funds in this asset class.
That is precisely the greatest risk to financial stability. And the ECB is directly targeting some platforms that allow investors to increase their exposure to crypto assets through leverage. For example, Binance offers leverage of up to 125 times the initial investment. Others, like Bybit or BitmeX, allow it up to 100 times. At the other extreme are platforms like eToro or Kraken, which only allow their investors up to a maximum of 2 and 5 times, respectively.
“The risk to financial stability could be magnified by the increasing opportunities afforded to investors by crypto asset platforms to increase their exposure through leverage,” the ECB warns. And he sets a revealing example. The Binance platform, the crypto brokerage giant, offers a maximum leverage of 125 times the initial investment. BitMEX and Bybit allow you to profit up to 100 times.
The big problem is that private investors control a large part of this market. According to the latest consumer expectations survey prepared by the ECB, as much as 10% of eurozone households own these types of assets. Most of them have an investment of less than 5,000 euros. Only 6% (buyers with higher purchasing power) say they have invested more than 30,000 euros.
The ECB recalls that, despite the crypto boom of recent years, this market still weighs less than 1% of the global financial system. But he warns that its size is already seven times larger than before the pandemic, with the creation, every day, of an average of 10 new virtual assets. “If the current trajectory of this ecosystem is maintained and financial institutions get involved, they could pose a risk to financial stability,” the ECB says.
Source: La Verdad
I’m Wayne Wickman, a professional journalist and author for Today Times Live. My specialty is covering global news and current events, offering readers a unique perspective on the world’s most pressing issues. I’m passionate about storytelling and helping people stay informed on the goings-on of our planet.
