Economics in a picture
Financial stress indicators in Portugal and the euro area increased sharply but remained below the levels observed in the last recession
The COVID-19 pandemic is causing an unprecedented contraction of economic activity globally and has prompted higher levels of stress in financial markets. The turmoil in financial markets may amplify the impacts of the pandemic crisis, through increased uncertainty, reductions in the value of asset portfolios of households, companies and credit institutions and increased cost of financing, reinforcing the recessionary effects on the economy.
In this context, since the beginning of March 2020, the main central banks have been adopting a wide range of measures in order to guarantee ample liquidity provision and the adequate functioning of the monetary policy transmission mechanism, thus contributing to the stabilization of international financial markets. These interventions, also of unprecedented magnitude, have contained the increase in the degree of risk aversion and volatility in international financial markets. Thus, composite indicators of financial stress in Portugal and in the euro area have increased significantly since the end of February but have remained below the peaks seen during the international financial crisis and the sovereign debt crisis in the euro area.
For details regarding the indicators see Braga, J., Pereira, I. and Reis, T., 2014, “Composite Indicator of Financial Stress for Portugal”, Financial Stability Papers, Nº 1, Banco de Portugal, and Holló, D., Kremer, M., and Lo Duca, M., 2012, “CISS – A Composite Indicator of Systemic Stress in the Financial System”, Working Paper Series, No 1426, ECB.
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