A combination of low interest rates and high outstanding debts poses a risk to the stability of global financial markets, warns De Nederlandsche Bank (DNB) in its latest bi-annual Overview of Financial Stability.
The Dutch central bank and payments regulator believes there are few incentives for reducing debt loads, which could potentially cause problems if market sentiment turns negative.
DNB notes that global debts have risen sharply since 2005.The joint debts of households, non-financial companies and governments last year were 230% of gross domestic product (GDP), against the 2005 figure of 200%. In a number of countries, specific problems may arise due to high debts and while the many risky corporate debts in the US have been widely reported, business debts are also relatively high in the Netherlands.
Elsewhere in Europe, government debt levels remain very high in countries such as Italy, Portugal and Greece. Little has been done to reduce debt, and in some countries levels have even risen in the past five years.
The central bank comments that the prolonged era of low interest rate ensures there is no incentive to pay off debts, while more recent issues such as Brexit and the growing potential for a trade war could trigger a correction on the financial markets.
“When risk premiums and interest rates rise sharply, debtors are confronted with higher interest charges, while substantial price adjustments can take place in financial markets,” said DNB.
Housing market imbalances
At home, DNB cites imbalances in the housing market as the greatest risk to financial stability. “A possible fall in house prices can have significant consequences for the Dutch economy and also for the Dutch banking system,” the report notes.
House price volatility reinforces economic fluctuations. “For example, the sharp price increases in the housing market in recent years have given the economy a boost, but when prices possibly fall during a crisis, this reinforces an economic decline.”
Elsewhere in the report, DNB says that the authorities are already assessing the risks posed by the dominance of US and Chinese technology giants, particularly as the new era of open banking beds in across Europe. It expects Google, Facebook, Apple and others to seize the opportunity offered by the revised Payments Services Directive (PSD2) to gain access to customers’ personal data.
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