Distracted by an unresolved migration crisis and talks on keeping Britain in the EU, eurozone leaders could be caught unprepared by a new storm on financial markets.
Global market turmoil since the start of the year has helped set warning lights flashing in eurozone sovereign bond markets.
In early February, the premium that investors charge to hold Portuguese, Spanish and Italian government debt rather than German bonds hit some of the highest levels since the eurozone crisis that peaked in 2011-2012.
European bank shares have been badly hit by concerns over their high stock of non-performing loans, new regulatory burdens and a squeeze on profits due to sub-zero official interest rates.
New EU banking regulations that force shareholders and bondholders to take first losses if a bank needs rescuing are further spooking the market, notably in Italy.
All this comes at a time when public resistance to further austerity has surged all over southern Europe, producing unstable results at the ballot box.
Furthermore, storm clouds are gathering above a slow eurozone economic recovery— growth is officially forecast to reach 1.9% this year versus around 1.6% in 2015.
Yet eurozone governments transfixed by differences over sharing out refugees, managing Europe’s porous borders and accommodating British demands for concessions on EU membership terms have a huge amount on their hands already.
At their most recent meeting, eurozone finance ministers said the latest market turmoil was no reason for concern at this stage.
The ECB has also come a long way since 2010. Markets expect the ECB to loosen monetary policy still further next month, but it’s not clear that such a move would bolster confidence in the banks.
However, worries about banks have been spreading to sovereign bonds in more vulnerable countries in a revival of the so-called “doom loop” EU reforms were meant to remove.
Pressure from eurozone hawks such as Germany and the Netherlands to either limit the amount of home-country debt that a bank may hold, or give national sovereign debt differential risk weightings on banks’ books have added to uncertainty.
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