A significant deterioration in corporate sector credit quality would not only imply greater loan losses for banks, but could also trigger an asset price adjustment in credit markets, especially if the frequency of unexpected idiosyncratic corporate defaults were to rise. Euro area household sector leverage has reached unprecedented heights. Thus, past experience is not relevant for assessing its sustainability.
Although household sector debt ratios in the euro area on average have remained lower than those in other mature economies, risks are not evenly spread across the euro area. Indeed, there are continuing concerns regarding balance sheet vulnerabilities in countries where debt-ratios are well above the euro area average, especially if debt is predominantly financed at variable interest rates.