This impact will vary from one institution to another, according to the starting position of each one and their exposure to the sectors and agents most affected by the crisis. In these circumstances, we need to avoid serious damage to the stability of the financial system, as this would make the crisis deeper and longer. Accordingly, we need to step up the surveillance of risks to financial stability and be prepared to respond forcefully, at European level, in the event that any materialise. In addition, banks must address their medium-term challenges decisively, including notably their low profitability, both in Spain and across Europe. At national level, some of the measures already applied need to be extended and regularly recalibrated. Currently, these need to be focused on the most severely affected groups of households and sectors, promoting the necessary structural adjustment, and to be adapted to the rate at which the recovery is taking place. In the corporate sphere, many companies will emerge from this crisis with higher levels of debt, and this may hamper the recovery and be a source of vulnerability. Strategies therefore need to be implemented to promote corporate financial restructuring. One of the main challenges is to avoid funds remaining at companies with no prospect of viability in the post-pandemic scenario. Likewise, the European recovery fund resources should be used to support sustainable restructuring and modernisation of the productive sector.
A large-scale downgrading of this debt, to below investment-grade status, would entail considerable potential losses for the financial system of the European Union (EU) as a whole, a significant part of which would correspond to indirect losses attributable to the forced selling mentioned above. The role of rating agencies in this process is fundamental. When making their assessments, these institutions need to take into account the long-term outlook for the corporation concerned and avoid excessively pro-cyclical behaviour. Indeed, this time round, rating agencies appear to have been more cautious than in the global financial crisis and, to date, phenomena comparable to those seen in the past have not occurred. In any event, the results of this exercise serve to show the systemic importance of this vulnerability and the need to be prepared to provide a sufficient, internationally coordinated response, depending on how the pandemic develops at international level. The impact on general government  A system-wide scenario analysis of large-scale corporate bond downgrades, ESRB Technical Note, 23 July 2020. 10  15  During the current crisis, the activation of automatic fiscal stabilisers associated with lower tax receipts and increased cyclical expenditure (for instance, on unemployment benefit), along with the effect of the discretionary measures adopted by the authorities to mitigate the impact of the crisis, is leading to very significant increases in budget deficits and public debt in all countries. Initially, there were also tensions in European public debt markets, which led to a sharp rise in sovereign spreads.