32 days ago • Posted by Charles-Henry Monchau

ECB warns of "Elevated" Financial Stability Risks amid "Remarkable Exuberance"...as Lagarde keeps printing press rumbling...

In what some have dubbed a repeat of Greenspan's "irrational exuberance" description of the dot-com bubble in the 1990s, this morning the ECB warned in its Financial Stability Review (in which it used the word "exuberance" at least 8 times), that the euro-area faces "elevated" risks to financial stability as it emerges from the pandemic with high debt burdens and “remarkable exuberance” in markets as bond yields rose. The stark warning, first reported by Bloomberg, sent risk asset reeling and cryptocurrencies tumbling and highlights mounting concerns that the flood of fiscal and monetary stimulus needed to fight the crisis is also building up dangerous imbalances.

Interestingly, they mentioned US equities as a risk, saying that “A 10% correction in U.S. equity markets could therefore lead to a significant tightening of euro-area financial conditions". They added that the euro zone is vulnerable to such spillovers because, like most countries, it has built up significantly higher debt during the crisis.

But wait in a minute, where is this exuberance coming from? A shown on the chart below (Bloomberg), the ECB keeps ramping up balance sheet expansion. Total assets rose by another €26.9bn to fresh ATH of €7,615.7bn as Lagarde keeps printing press rumbling. ECB balance sheet now equal to 76.6% of #Eurozone GDP vs Fed's 35.5%, BoE's 38.4%, BoJ's 132.5%.

How to avoid creating financial bubbles and moral hazard while keeping the economic recovery on track? There is no easy way out. Do you remember the (mild) Fed tapering in 2018? 

ECB Balance sheet