Risks To Euro Zone's Financial Stability Remain High

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ECB: RISKS TO EURO ZONE'S FINANCIAL STABILITY REMAIN HIGH
ECB: CREDIT CYCLE HASN'T YET REACHED A TROUGH
ECB: CORPORATE DEFAULTS A LIKELY SOURCE OF FURTHER STRESS
ECB: SOME BANKS REMAIN HEAVILY DEPENDENT ON CENTRAL BK FUNDS
ECB: BANKS CONTINUE TO PREFER SHORT-TERM NEW DEBT ISSUANCE
ECB: STILL UNCERTAINTY ABOUT SHOCK-ABSORBING CAPACITY OF BKS
ECB: MARKET, POLICY MAKERS MUST REMAIN ESPECIALLY ALERT
ECB: POSSIBLE FURTHER 09-10 LOSSES OF EURO ZONE BKS EUR283B


16:00 15Jun09 ECB: Risks To Euro Zone's Financial Stability Remain High




FRANKFURT--The euro zone's financial sector is likely to face a new round of tests as more corporate defaults, deteriorating credit conditions and falling asset prices add stress, the European Central Bank said in its biannual stability review Monday.

Market participants and policy makers should be "especially alert in the
period ahead," the ECB said, and mustn't be lulled by the massive state
interventions to rescue banks and insurers or lower central bank interest rates.

"There is no room for complacency because the risks for financial stability remain high, especially since the credit cycle has not yet reached a trough," the central bank said.

The profitability of large banks in the 329 million-people monetary union has eroded further since the beginning of the year and the prospects for an imminent turnaround are bleak, the report said.

Further pressure could soon materialize, the bloc's lender of last resort said.

It called corporate defaults a "likely" source of more stress, adding to
ongoing asset write-downs and deleveraging of balance sheets.

"Increasingly... attention is focusing on corporate debt and the likely loan losses that may materialize as the turmoil continues and the real economy endures a significant slowdown," the report said.

In turn, lenders may face more dire times ahead or raise risk premia, which could trigger a vicious cycle for the economy as a whole through lower investment, the report said.

"The level of indebtedness of the euro area corporate sector remains
relatively high" and prospects for profits are declining, the report said.

ECB Vice-President Lucas Papademos has called on European banks to use options to further strengthen their capital base. In contrast to the United States, most of the government schemes in the euro zone to support the financial sector have been voluntary.

Large European banks have raised EUR46 billion in new capital from private investors and states injected an additional EUR64 billion, to ward off the negative impact from illiquid assets and write-downs, the report found.

But "uncertainty prevails about the shock-absorbing capacity of the banking system," the ECB said and some "banks have remained heavily dependent on central bank funding."

The ECB has flushed the market for banks' liquidity provisions with central bank funds since the onset of the crisis in mid-2007. It relaxed collateral conditions, even accepting many assets that can't be traded anymore. It will also launch its first year-long tender June 23, providing banks with exceptional certitude for the refinancing conditions of the loans they hand out.

The ECB has slashed its key interest rate to 1% from 4.25% since the demise of Lehman Brothers last year.

The sluggish outlook for both the U.S. and the euro-zone economies make the financial system more vulnerable as slower growth will affect profits and earnings.

The ECB predicts subdued economic growth will not return until mid-2010 at the earliest.

This will affect a wide range of assets, including property and household purchasing power, due to higher unemployment.

The ECB conducted the report together with national central banks as well as regional banking watchdogs. Confronting doubts about the reliability of the data provided by the national authorities, ECB Jean-Claude Trichet Friday told a journalist the ECB has "full confidence" in the work of its national partners.

ECB Web site: www.ecb.int

purch

subdued economic growth will not return until mid-2010

No Green-shoots in Euroville !!!!!