Thu, 07 Dec 2023

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Analysts said a major factor contributing to the troubles was rising interest rates, as central banks labored to rein in inflation.

ROME, March 16 (Xinhua) -- With central banks' efforts to combat soaring inflation over the last year seen as having a major role in recent troubles for the European banking system, analysts say new adjustments to policy could have a knock-on effect slowing economic growth and lengthening current inflationary trends.

Within days of the failure of two United States banks -- Silicon Valley Bank (SVB) from California and New York's Signature Bank -- worries about its impact on European financial institutions began to push share prices downward. Led by banking shares, most European stock exchanges suffered significant losses on Monday and Wednesday, each time followed by only modest rebounds.

The biggest European victim so far was Credit Suisse, the Swiss banking giant. The company's shares lost almost a fourth of their value on Wednesday.

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Analysts said a major factor contributing to the troubles was rising interest rates, as central banks labored to rein in inflation sparked by the conflict between Russia and Ukraine. In 2022, prices in the eurozone rose by an average of 8.4 percent, the highest rate recorded since the introduction of the euro currency in 1999.

"Both the Fed (U.S. Federal Reserve) and the ECB (European Central Bank) underestimated the resurgence of inflation," Giorgio Di Giorgio, a professor of macroeconomics and monetary policy at Rome's LUISS University, told Xinhua.

"They started to react to the increase of inflation above the 2-percent objective with six or eight months of delay, and they were not the only ones," Di Giorgio said, adding that when the central banks reacted to rising prices, they did so aggressively by raising interest rates.

"Clearly, when you do something like this, and you keep doing it for a year, as the Fed has been doing for eight months, and as the ECB has been doing, you are putting a weight on the shoulders of those who hold debt."

That was the case for the banks hit hardest, be they the U.S.-based banks or Credit Suisse and other European institutions, said Di Giorgio.

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Sandro Sandri, professor of corporate finance at the University of Bologna, said that regardless of the reasons behind the recent bank difficulties, the impact of the crisis will be widespread.

"I think we're seeing the result of arrogance on the part of financial markets," Sandri told Xinhua. "Now economies will pay the price."

Sandri said he believed economies would suffer from a slowdown in lending from financial institutions worried about liquidity, especially in the high-tech sector. He also predicted higher yields on government bonds, all combined to result in slower economic growth.

"This is all happening very, very quickly, showing us how quickly news can travel and impact markets," said Sandri.

Both Di Giorgio and Sandri said that recent events would force central banks to reevaluate their strategy of battling inflation through increasing interest rates, though neither predicted it would be reversed in the short term.

"I think we're going to see central banks slow down the pace at which they raise interest rates," said Di Giorgio. "They will continue to do it, but they will do it more gradually."

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