In its financial stability review, out today, the European Central Bank acknowledges that the vicious circle between a sovereign’s finances and the health of its banks has become far more pronounced in recent months.
Ultimately, what became painfully clear in the autumn of this year was that bank and sovereign vulnerabilities are inseparable in several countries. At the aggregate euro area level, partial solutions were no substitute for a comprehensive approach to stem contagion and the interplay between fiscal and banking sector vulnerabilities. These two factors needed to be considered in tandem – as two sides of one and the same coin.
The central bank also warns of another facet to this negative feedback loop: the deterioration in the growth outlook. Read more