June 25, 2024

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Eurozone facing ‘severe risks’ to financial stability, admits ECB

The eurozone’s financial system is ­facing “severe risks” from the chaos gripping global markets, the European Central Bank said in an unprecedented warning as Germany unveiled a €200bn (£177bn) borrowing binge.

The institution told the region’s banks to prepare for financial turmoil caused by huge falls in investments and potential disaster in the house market.

A fresh wave of selling hit stocks across the world today as central bank officials continued to fuel expectations of aggressive interest rate increases to cool red-hot inflation, with US stocks dropping 2.7pc to their lowest level since November 2020.

However, the pound bounced back above $1.10 versus the dollar for the first time since Kwasi Kwarteng rattled markets with his mini-Budget and UK borrowing costs eased off their highs.

The latest swings on markets came as Germany took a swipe at Britain’s plan for debt-funded tax cuts as it sought to prevent market turmoil spreading in response to its energy bills support.

Christian Lindner, finance minister, attempted to distance his €200bn “defensive shield” for German households from the UK’s mini-Budget.

He said Germany would not follow the UK’s radical new economic policy of unfunded tax cuts, even as Olaf Scholz’s government announced it will ramp up borrowing to finance a relief package that will cap gas prices.

In a sign of growing nerves in Europe over market turbulence, Mr Lindner sought to differentiate Germany’s temporary energy support from the UK’s package, which will permanently increase the deficit unless offset by future spending cuts or rapid growth.

He said: “We want to clearly separate crisis expenditure from our regular budget management, we want to send a very clear signal to the capital markets.”

Meanwhile, Spain’s socialist-led government agreed a temporary wealth tax to fund its efforts to fight the crisis. People with a fortune of more than €3m would be taxed at 1.7pc, rising to a rate of 3.5pc for those with more than €10m.

The European Systemic Risk Board – a part of the ECB led by the bank’s president Christine Lagarde – added to concerns about growing market turbulence after a sharp sell-off in stocks and bonds in recent weeks.

European stocks tumbled a further 1.7pc to slip to their lowest level since late 2020 as government borrowing costs marched higher. Shares in the region have slumped 22pc this year.

The FTSE 100 suffered a fall of 1.8pc, while the more domestically focused FTSE 250 dropped 3.1pc.