ECB sees risk higher yields trigger debt sustainability concerns

[FRANKFURT] The European Central Bank said debt-sustainability concerns have risen in the past six months amid a potential increase in yields and political uncertainty in some countries.

"Risks to financial stability stemming from financial markets remain significant, mainly owing to the possibility of a further rapid repricing in global fixed income markets," the Frankfurt-based institution said in its semiannual Financial Stability Review.

"Such an abrupt repricing could materialize via spillovers from higher yields in advanced economies, in particular the United States."

The Federal Reserve has raised interest rates twice since late last year and policy makers predict two more hikes in 2017 as unemployment and inflation improve.

In Europe, an exit from unconventional stimulus is also moving closer, even though officials caution that - in the light of still muted inflation and global economic risks - quantitative easing must be unwound very gradually before higher borrowing costs should even be discussed.

Euro-area banks still are vulnerable as low interest rates and a big stock of non-performing loans in some regions challenge profitability, the ECB said.

The risks that the euro-area economy would face restrictions in accessing financial services after Britain's departure from the European Union is limited, the ECB said.

"This notwithstanding, well-managed preparations will be essential as a relocation of financial services capacity during the transition from the current situation to the new equilibrium could, in some cases, face frictions," according to the report.

"Therefore, the ECB underlines the need for the concerned banks and other financial institutions to undertake all the necessary preparations in a timely manner."

BLOOMBERG