The Bank of Korea: "Fiscal and Financial Risks in Southern Europe and Euro Area... Safety Net Inspection Needed"

[Asia Economy Reporter Kim Eunbyeol] As the novel coronavirus infection (COVID-19) rapidly spreads, there is a forecast that Europe will experience a situation similar to the 2008 financial crisis and the 2012 fiscal crisis again.

On the 17th, the Bank of Korea stated in its 'Overseas Economic Focus' that "concerns about the sustainability of government debt are increasing, especially in some Southern European countries, following the COVID-19 outbreak." It reported that due to the decrease in tax revenue and increase in government spending caused by the COVID-19 shock, the fiscal indicators of Eurozone countries are expected to deteriorate significantly. The primary fiscal balance ratio of the Eurozone fell by about 8.0 percentage points from 0.9% last year to -7.1% this year. Meanwhile, the government debt ratio rose by 15.6 percentage points from 86.4% to 102.0%.

The Bank of Korea said, "Although the possibility of a default occurring in the short term is not high, some Southern European countries have relatively high default risks and their credit ratings are close to the lower bound of investment grade, so continuous monitoring is necessary."

Financial conditions within the Eurozone are also unfavorable. The European financial conditions index has deteriorated sharply, and regional bank stock prices have fallen. The Bank of Korea explained, "Banks in some Southern European countries hold a high proportion of their own government bonds, so they may be exposed to valuation loss risks when government bond yields rise. Additionally, the mutual exposure among major country banks is large, so losses in one country could potentially be transmitted to banks in other countries in a chain reaction," adding, "The scale of capital increases needed to prepare for losses is expected to grow further."

Furthermore, the Bank of Korea pointed out, "Looking comprehensively at fiscal and financial conditions, it is difficult to be optimistic about the possibility of economic risks in the Eurozone worsening in the future," and noted, "Some Southern European countries appear to have relatively weak fiscal conditions, and recently CDS spreads have widened, so if their sovereign credit ratings are downgraded in the future, they may face difficulties in raising funds through government bond issuance." It also advised, "The adequacy of safety net sizes that can respond in emergencies and the discussion process at the Eurozone-wide level should be closely monitored."

This content was produced with the assistance of AI translation services.