FRANKFURT (Reuters) - There is a risk that a euro zone recovery might be delayed a few quarters and, in a worst-case scenario, the common currency area might have a Japanese-style lost decade, European Central Bank Executive Board member Benoit Coeure said on Friday.
Coeure said, in the text of a speech to be given at Amundi World Investment Forum, that recovery starting later this year remains the baseline scenario, but added that growth risks are on the downside.
"If the short term risks scenarios were to materialize, they might push the full recovery back by some quarters," Coeure said.
"A more worrisome possibility, however, is that of a persistent slowdown. Action is necessary to ensure that it does not materialize."
In the 1990s, Japan experienced a decade of no-to-slow growth. Coeure pinpointed the banking sector as the risk factor for a lost decade, and said that banks have to be brought back to health - or closed down.
"A particularly worrisome scenario for the euro area is related to the possibility that the banking sector's efforts to reduce leverage and to restructure its balance sheets have not yet been completed," he said.
"Troubled banks' balance sheets have the potential to choke the engine of recovery and exert a more persistent drag on economic growth."
While Coeure said that there might still be a few "zombie banks" in the euro zone, he stressed that as a whole, euro zone banking sector was in a better shape than the Japanese one in the 1990s.
However, high government-bond yields have made it more lucrative for banks to invest in them.
"This sovereign-bank nexus .... can become a threat to long-term economic recovery in the euro area," Coeure said.
(Reporting by Sakari Suoninen, editing by Paul Carrel)