The European Central Bank (ECB) is continuing its Quantitative Tightening (QT) efforts, and its balance sheet has contracted by an additional €17 billion, now standing at €7,135.7 billion. This marks the lowest level since March 2021. What’s striking is that the ECB’s total assets now account for a significant 51.4% of the Eurozone’s GDP, which is considerably higher than the Federal Reserve’s (Fed) 30.2%, the Swiss National Bank’s (SNB) 111.5%, or the Bank of Japan’s (BoJ) 126.8%.
Even if interest rates remain stable, it’s important to recognize that monetary tightening can manifest in other ways. In this regard, the Eurozone is feeling the effects of monetary tightening more acutely than the United States.
Several factors contribute to this heightened impact:
- Refinancing Cliff: The Eurozone faces a more substantial and faster-approaching refinancing cliff, set for 2024. This means that a significant volume of debt needs to be refinanced in a relatively short period, increasing financial stress.
- Variable-Rate Mortgages and Corporate Bonds/Loans: The Eurozone has a higher prevalence of variable-rate mortgages and corporate bonds/loans. As interest rates rise, the financial burden on borrowers with variable-rate loans becomes more pronounced, impacting consumer spending and corporate financial health.
- Heavy Reliance on Bank Loans: The chart below illustrates the Eurozone’s significant reliance on bank loans for funding. Tightening monetary conditions can make borrowing more expensive, which has a cascading effect on businesses, individuals, and the broader economy.
This scenario underscores the challenges and vulnerabilities within the Eurozone’s financial system as it grapples with the consequences of monetary tightening. The impact is being felt more intensely due to the unique combination of factors outlined above, making it a critical concern for policymakers and economists monitoring the region’s economic stability.
Sources:
#ECB QT continues w/balance sheet shrank by another €17bn to €7,135.7bn, lowest since Mar2021. ECB's total assets now equal to 51.4% of Eurozone GDP vs Fed's 30.2%, SNB's 111.5%, or BoJ's 126.8%. Even if interest rates do not rise further, this does not mean that monetary… pic.twitter.com/YfMlMTxeuT
— Holger Zschaepitz (@Schuldensuehner) September 19, 2023
The Eurozone is feeling the heat from monetary tightening much harder than the US
Reasons:
– A heavier refinancing cliff hitting quicker (2024);
– More variable-rate mortgages and corporate bonds/loans;And as the chart below shows:
– Heavy reliance on bank loans for funding pic.twitter.com/v3xfVqE8s9
— Alf (@MacroAlf) September 19, 2023