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17th Apr 2021

ECB: No one is 'safe' from euro crisis

  • The paper identified 18 key crisis episodes (Photo: Valentina Pop)

A new report by the European Central Bank (ECB) says that even "safe haven" countries are prone to financial shocks from the euro crisis.

The paper, by ECB economist Livio Stracca, out on Monday (12 August), notes that the profitability of financial companies jumped up or down at key moments in the crisis between January 2010 and May 2013 even in places, such as Germany or the US, where sovereign bonds remained healthy.

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It says negative crisis events provoked "risk aversion" on global markets, hurting developing states, and caused the euro to fall in value.

The crisis episodes had only a "marginal" effect on other currencies, such as the US dollar, the Swiss franc and the yen, however.

They also failed to disrupt oil and gold prices, which crept steadily upward.

The paper identified 18 important crisis events, highlighting the impact of EU statements, of political developments and of media reports.

In terms of EU reactions, positive episodes include a May 2010 promise to take "drastic action" by EU leaders and a July 2012 statement by ECB chief Mario Draghi that he will do "whatever it takes" to save the euro.

They also include a September 2012 ECB announcement that it is buying distressed Italian and Spanish bonds (the so-called Outright Monetary Transactions programme) and an October 2012 EU summit deal to create a banking union.

Negative political events include; a July 2011 scrap on austerity between the then Italian PM Silvio Berlusconi and finance minister Giulio Tremonti; violent street protests in Italy and Spain in September 2012; and a hung parliament in Italy after elections in February this year.

Media reports - such as leaks in late 2010 that the ECB is already buying distressed bonds, or press stories in November 2011 that France and Germany talked about a potential euro break-up - also moved markets.

The negative events typically saw bond-buyers flee from crisis-hit states such as Greece, Ireland, Italy, Portugal and Spain to Germany, Japan, Switzerland, the UK or the US.

They saw relatively stable or lower bond yields in the non-euro states or "safe" euro countries, but banks, hedge funds or other financial firms in the "safe" markets saw their profits plunge.

Each negative shock also saw the euro go down by around 0.2 percent.

Stracca described the crisis as an "experiment for the global transmission of shocks … contagion and spillover."

He said the damage, for example, to German bank profits shows the importance of the "bank-sovereign nexus," which is "at the core of the euro debt crisis."

He noted that the advanced nature of some countries' economies or their decent debt-to-GDP ratios are minor factors in protecting their banks from fallout.

But he said "real" economic links with distressed euro states play a huge role.

"Trade and economic links with the euro area always increase contagion," he noted.

"The trade and economic link with the euro area ... is the most important channel of contagion," he added.

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