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DW Wealth Snippet 22 May 2021 vol.697


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This Week Highlight - Impending Risk Rising in Eurozone
On 22 April,  European Central Bank (ECB) head Christine Lagarde said the economy is still “on crutches” and in need of support from both the central bank and government spending. The rising threats of covid-19 has engulfed the slowdown among 19 countries in Euro bloc as extended lockdowns implemented. 

Lagarde said that policymakers in the Eurozone see an eventual rebound before year-end but did not discuss any reduction in its emergency stimulus. 

The ECB left interest rate benchmarks untouched at minus 0.5 percent while made no adjustments to its EUR1.85 trillion (est USD2.22 trillion) in bond purchase stimulus that will run through March 2022. 

On 19 May, ECB Vice President Luis de Guindo said there could be a financial risk coming forth in Eurozone as the region might need more stimulus. Till now, the pandemic has hit different economic sectors with varying degrees of severity and speed, with tourism and hospitability among the most impacted.

Policymakers are particularly concerned about a higher corporate debt burden in countries with larger service sectors because this could increase pressure on governments and lenders in these nations. Guindo asked for caution as the central bank expects a possible increase in insolvencies in 2021. 

The ECB fears that the situation moving into 2021 will see bank profitability remains weak while prospects for lending demand are uncertain. Bank asset quality has been preserved so far, but credit risk may enlarge with a lag, implying a need for increased loan loss provisions. 

While sovereign debt and corporate debt financing instruments are ballooning in wake of the pandemic crisis, it will be a worry if the Eurozone can manage its economic recovery amid the growing deficits in all sectors. In the event of the interest normalizing to taper the deficits, we foresee the equity market and asset bubble will rupture. 

If you think Y2021 is a tough year, then we suppose Y2022 will be the greatest challenge to many business owners and entrepreneurs. Hedging into safe haven will begin now in order to safeguard your hard-earned fund. 

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