DOOM LOOP

Description

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Context: Recently, the European Central Bank (ECB) called an emergency meeting for a doom loop. Many economists have warned that Europe may be headed for a doom loop

Details:

What is a doom loop?

A doom loop is the circle of vulnerability where a country’s banking system can be severely hurt by volatility in the economy.

Impact:

A country is at risk of a doom loop when a shock to one part of its economic system is amplified by its effect on another.
Thus resulting in a contraction in lending provided by the banks.
This contraction in credit, in turn, slows the domestic economy, resulting in a further deterioration in the price of the sovereign’s bond issues.
A government under financial stress may have to cut spending or raise taxes when the economy is weak. That in turn can aggravate fiscal problems.
The circle can also be activated by external forces such as a slowdown in global economic activity due to natural recession or trade friction.

https://www.economist.com/the-economist-explains/2022/06/22/what-is-the-doom-loop-in-the-euro-zone