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ECB warns of risks to financial stability arising from global elections and geopolitics
Geopolitical tensions and a series of elections around the world are increasing the risk of investors being shaken by negative surprises and endangering financial stability, the European Central Bank warned.
Until now, markets have taken a relaxed view of such threats, leaving them exposed to sudden shifts in sentiment in the event of shocks, the central bank said in its biannual Financial Stability Review, published Thursday. He also warned that national and European Union votes increase uncertainty about the trajectory of public finances.
“The scope for adverse economic and financial surprises is high and the risk outlook for euro area financial stability remains equally fragile,” ECB Vice President Luis de Guindos said in the report. “Sentiment can change quickly, particularly given the geopolitical environment and the price for perfection, which creates the potential for large market reactions to disappointing news.”
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Global dangers have only increased since Russia invaded Ukraine on the eurozone border in 2022, with the Middle East representing the latest hot spot. The elections – including Donald Trump’s attempt to return to the White House in November and the European Parliament elections next month – add even more uncertainty to the mix.
Despite this scenario, the odds of a soft landing in Europe have increased as inflation eases to 2% without a deep recession or a rise in unemployment. The European Commission predicted on Wednesday that price growth will moderate more quickly than previously predicted, while prospects for an economic recovery will remain intact.
This means that global threats to financial stability have decreased compared to the last report six months ago, the ECB said. He added, however, that question marks over government policies and economic conditions remain high.
This is reflected in views on the path of ECB interest rates. Authorities did not dare commit to much more than a highly likely first cut in June, citing the need to remain dependent on incoming data.
“Volatility in financial markets could increase significantly if inflation deviates substantially from consensus expectations, if economic growth weakens or if geopolitical conflicts increase further,” warned the ECB.
Another concern is public finances. According to the Commission’s forecast, budget deficits that increased significantly due to the pandemic and energy support are not decreasing as quickly as previously thought.
While currently benefiting from relatively benign conditions in financial markets, high debt levels are leaving governments vulnerable to external shocks if they need to increase spending, according to the ECB. Meanwhile, the eurozone’s deep economic issues complicate addressing such burdens.
“Structural obstacles to potential growth, such as weak productivity, for example, are raising concerns about long-term debt sustainability, making sovereign finances more vulnerable to adverse shocks and increasing risks to financial stability prospects. ”, stated the ECB.
He also warned that restrictive financial conditions are testing families and businesses that have so far remained resilient to rising borrowing costs.
“This should not be a reason for complacency, as pockets of vulnerability remain,” said Guindos. The ECB is particularly concerned about lower-income households and companies with lower credit ratings.
These challenges are compounded by recent turbulence in the property sector, the ECB said, although it expects the recession to “remain orderly”.
On a more positive note, the ECB stated that even though corporate insolvencies have risen to levels above pre-pandemic levels in several countries, “defaults and non-performing credit rates have remained relatively low”.
Photograph: Luis de Guindos, vice-president of the European Central Bank (ECB), listens during a rate decision press conference in Frankfurt, Germany, on Thursday, September 12, 2019. Photo credit: Alex Kraus/ Bloomberg
Copyright 2024 Bloomberg.
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