Date
10 December 2016
ECB President Mario Draghi addresses the European Parliament's Economic and Monetary Affairs Committee in Brussels on Nov. 28. Photo: Reuters
ECB President Mario Draghi addresses the European Parliament's Economic and Monetary Affairs Committee in Brussels on Nov. 28. Photo: Reuters

Prolonged low rates have set terrain for market risks: Draghi

A lengthy period of low rates have created “fertile terrain” for financial-market risks, including a buildup of debt and excessive risk-taking, the head of the European Central Bank warned Monday.

Speaking at the European Parliament in Brussels on Monday, Mario Draghi also flagged “significant vulnerabilities” in eight European real-estate markets and urged governments to take action to tackle the risks, the Wall Street Journal reports.

The comments as ECB officials are expected to decide on Dec. 8 whether to extend a quantitative easing program that involves bond purchases worth 80 billion euro a month.

With growth and inflation still weak, most economists expect an extension of at least another six months, but Draghi’s remarks laid bare the risks of such a move, the Journal noted. 

The ECB had launched repeated waves of stimulus over the past two years, pushing interest rates below zero and buying more than 1.3 trillion euro of government and corporate debt in an effort to shore up the region’s economy.

While the policies have helped to drive down borrowing rates across the eurozone, supporting lending and growth, they triggered side effects, including a surge in the prices of stocks, bonds, real estate and other assets.

On Monday, a risk-monitoring body chaired by Draghi published warnings it had sent to eight European finance ministers, highlighting vulnerabilities in their residential property markets.

The concerns relate to potential price bubbles, rising debt levels and the ability of households to repay their mortgage debt.

The countries involved are Austria, Belgium, Denmark, Finland, Luxembourg, the Netherlands, Sweden and the UK

While those property markets pose no immediate danger for the region’s financial system, Draghi warned that an economic shock could quickly lead to loan defaults and price falls.

“Right now, the greatest risk comes from impaired growth, from the possibility our recovery doesn’t firm and growth stalls,” he said.

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RC

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