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What's going on?

The European Central Bank (ECB) warned on Wednesday that European banks are driving headlong toward weak profits and big losses in 2021.

What does this mean?

The ECB publishes a review of the biggest risks facing the eurozones financial system twice a year, and banks were top of its mind this time around. See, Europes companies have been borrowing significantly more money during the pandemic, and theyve relied on government and ECB support to pay off the loans. The worry now is that they wont be able to do so without that support and that banks havent put enough money aside for when that happens. Throw in record-low interest rates that limit the amount that banks can make on those loans, and they could see their profits and their ability to lend put under serious pressure.

Why should I care?

For markets: Dividends or death.


Back in March, the ECB banned European banks from paying investors dividends in hopes itd help them outlast the pandemic. But theyve recently been lobbying the central bank to lift the ban, arguing that its putting off income-hungry investors and damaging their share prices which are down by more than 20% this year. The ECB didnt commit one way or the other in its report, but it did admit itd be difficult to keep the restrictions in place beyond the end of the year.



The bigger picture: Hedge your debts.


The ECB highlighted a few other risks to the eurozone in its report too. For one, it said the markets are due for a correction soon a sentiment the US Federal Reserve echoed just the other week. For another, the central bank warned of rising debt levels across governments, companies, and households. And its not wrong: the Institute for International Finance just announced global debt reached a record high of $272 trillion last quarter and said it could be almost four times the size of the global economy by the end of the year.

Originally posted as part of the Finimize daily email.

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