The International Monetary Fund said Wednesday that banks and businesses are still fragile in the eurozone periphery, which extends from Cyprus and Greece to Italy and Spain.
“The debt overhang at listed companies in the euro area periphery is sizeable» and «unsustainable», especially in the context of weak growth, the IMF said in its twice-yearly Global Financial Stability Report, citing in particular companies in Portugal and Spain.
“Many banks in the euro area periphery remain challenged by elevated funding costs, deteriorating asset quality, and weak profits,» the IMF said.
The bank crisis in Cyprus has exacerbated the situation by scaring investors region-wide and sparking a sell-off in bank shares throughout the eurozone, the IMF said.
The Fund expressed concerns about the health of some non-financial companies because of debt accumulated before the financial crisis, especially in Ireland and Spain.
The problem of excessive debt does not mean companies will default, the IMF said, but they will need to take steps, such as cutting operating expenses and investment, to bring debt down to sustainable levels.
Even so, the IMF called for vigilance over the quality of periphery firms’ assets, stressing their capacity to pay back debt is «much weaker» than in the eurozone core.
Although acute risks in the euro area have declined in the six months since the last report due to «strong policy action,» significant challenges remain, the IMF said.
“More work needs to be done in the short term to improve bank and capital market functioning, while moving steadily toward a full-fledged banking union,» it said.
As for the sovereign debt crisis in the 17-nation bloc, the IMF noted that the European Central Bank’s government bond-purchase program had helped boost confidence in public debt but its impact was dwindling.
In September 2012, the ECB unveiled its new Outright Monetary Transactions program but has not used it, with its existence alone helping to bring down eurozone countries’ borrowing costs in the markets.
“This dynamic could change» under political developments that could complicate OMT implementation, the IMF said, pointing to «the uncertainty surrounding the election outcome in Italy.”
The eurozone’s third-largest economy still lacks a government after a general election in February narrowly won by the left.