In the mean time, the IMF has projected that global GDP growth has come down to just about 3%. Some Euro Zone (EZ) countries like UK and German, it is said that there are some risks prior to financial stability. European Central Bank (ECB) Vice President Vitor Constancio said that right now the Euro Zone Financial stability is at low risk level. Several general indications has showing the position of Euro area in the cycle, related to the markets. There are a little bit of risks in EZ but still advanced in the financial cycle and lower pressure as of the markets than other parts of the world, in particular the US.
Some of the main risks is said to be the possibility in financial asset markets, increasing bond yields, and suffering commodity prices which then implies for capital losses of financial institutions. There are some triggers to this matter, first is the possible spill over effect if the increase of the interest rate in the US also in deceleration of growth. Second, vulnerability in the emerging markets, and lastly the general of loan nominal gross in US area. These main points that triggers risks are expected to may or not materialize in the upcoming year. Vitor says that it will be an indirect effect for the stability.
As so for the possibility of direct effect, Europe still have a direct contagion regarding increasing interest rates in the US. Vitor point that there are some differences between Europe and the US. “The economy situation in Europe is different, the fundamental is different, monetary policies are different, and will become even more different. So indeed the markets of Europe can stand that. Recoveries ongoing and that is one of the elements if indeed the spill overs to emerging markets are materialize in the significant way.”
The Vice President of ECB says that they don’t expect that the difference would be too significant as the Europe have their our own policy tools to aim objectives to increase stability in the Euro area. It is dependent to the objective and determine regarding price stability, so there is no such direct impact from the US to the EZ. Right now the Europe inflation is very low and trying to ensure price stability in both directions. All the rest is up to the market to react to EZ policy which are strictly determine by domestic factors.
Related to other countries financial situation, Vitor also said that security situation also have an impact to the global economy. “There are geopolitical risks, no doubt, in the horizon and particularly more significant than they are happened in several parts of the world. Of course the terrorism in the Europe itself could effect confidence, the degree of risk version, and levels of consumption. All that could be aggravate the situation. Countries are now stepping up security,” he added. So he says, the economy impact between regional could be more direct.
He himself could not predict whatever will happened after December 3rd. By the day, Europe will start projections for the next years and it will be very important for the decisions. It will impact on medium term decisions where economics growing, where influence effects the objectives, and to increase stability in medium term.
On the other hand, Bundesbank Board Member Andreas Dombret were talking about Germany-driven banking landscape. He says that it is very sensitive to interate risks in German-driven banking. The banks are not living in the capital market, but more of a lending and credit based economy. So the smaller the banks become, the more they are depending on the interest rate income. Giving the very low trace and the environment they are in, the suffering became bigger. The larger the banks, they are also generating profits from trading activities and other sources, so they are not that much depending only on interest income.
What really interesting about low rate investment is how long it stays. The longer you have this period, the longer it becomes. It will also lead to the fact that creditors will take out loans, probably quite long term which is harder for banks. if you booked as a bank, a long term maturity for quite some time is low yielding as it is today. For example in 15 years, is like booking low profitability business for quite some time. This is, says the Board Member, is worrisome.
“We have asked the banks in Germany and the exercise of the low banking is not changing very much, they assuming that they’re able and also assuming that they are saying they don’t have reasons to do more than they do now. They are not reserve to rebuild. On the other hand in five years want to raise cost by 25%. German banks not only depend by how much its earned, but dependent on how much capital the banks have. They are able to increase equity of German banks and stays around above 60,5% which is not bad in international comparison. They might be living off their reserves,” he said.
If there is somewhat low emerging markets, this will impact on German companies. The large and the middle companies which partly export oriented will get affected. It is said that German has lesser export to China this year.