FRANKFURT, June 15 The euro zone debt crisis
risks sparking a destabilising chain reaction through the bloc's
financial sector, the European Central Bank said on Wednesday.
In its twice yearly Financial Stability Review, the ECB
urged those countries under European Union fiscal programmes --
Greece, Ireland and Portugal -- to meet their deficit reduction
goals or risk triggering "adverse financial reactions".
The ECB is concerned that any form of sovereign debt default
could trigger another Lehman-type crisis, pushing up bond yields
for countries like Spain and dragging them into the mire.
"The interplay between the vulnerabilities of public
finances and the financial sector, with their potential for
adverse contagion effects, arguably remains the most pressing
concern for euro area financial stability at the moment, despite
several encouraging signs of containment," the ECB said.
Highlighting contagion risks from the Greek crisis, shares
in top French banks tumbled on Wednesday after credit ratings
agency Moody's said it might downgrade them because of their
exposure to Greece's debt-stricken economy. [ID:nLDE75E0JG]
The EU and the International Monetary Fund bailed out Athens
to the tune of 110 billion euros ($160 billion) just over a year
ago, but a new rescue is now being thrashed out for Greece as it
continues to sink under a debt pile that totals roughly 150
percent of its annual output.
As well as Greece, Ireland and Portugal have also tapped
EU/IMF aid. The ECB urged them, and others, to meet their fiscal
austerity targets or risk renewed financial market instability.
"Any delay in meeting country-specific adjustment targets
agreed at the European level, in particular as regards the
correction of excessive deficits, could trigger further adverse
financial market reactions and undermine macroeconomic
and financial stability in the euro area," the ECB said.
Turning to the euro zone money market, the ECB said it had
continued to normalise, citing shorter maturity profiles, lower
Euribor/EONIA spreads and lower excess liquidity as signs of
The ECB has remained careful not to withdraw support to the
economy and banking system so fast as to stall the recovery or
endanger banks' ability to cope with limited liquidity.
Last week, the ECB said it would carry on providing
unlimited funding at its three-month liquidity operations for at
least the next three months. [ID:nLDE7580TV]
"Looking forward, a further phasing-out of non-standard
measures may continue to spur more interbank activity, but it
may also represent a challenge for some banks in euro area
countries under stress," the ECB wrote in the review.
(Reporting by Paul Carrel and Sakari Suoninen, editing by Mike