Trade war biggest threat to financial stability - ECB
(28 May 2019 - Europe) The European Central Bank (ECB) has warned trade tensions pose the highest risk to continued global economic growth and could even destabilise the eurozone’s financial system.
An ECB analysis showed that the more open an industrial sector was, the more negatively its share prices reacted to the announcement of new tariffs.
Such an event could also spark another European sovereign debt crisis, as financing costs for vulnerable sovereigns are likely to increase according to the latest ECB Financial Stability Report, adding that this “may unearth debt sustainability concerns”.
Pointing to uncertainty about global growth and volatile financial markets, ECB Vice President Luis de Guindos quoted "If downside risks to the growth outlook were to materialise, risks to financial stability may arise. Trade tensions are the main risk for growth and could trigger a fall in asset prices which could then destabilise corporates as well as banks" he added.
Equities and bond yields across the globe tumbled after President Donald Trump threatened to impose tariffs on Mexico. The yield on 10-year US Treasurys fell to a fresh 20-month low and German 10-year bunds hit an all-time low. Economists expect the ECB to offer generous terms on funding for eurozone banks on the condition they hit lending targets. "The risk of an economic slowdown is calling for more monetary accommodation" DekaBank economist Kristian Toedtmann says.
The ECB also raised fresh concern about the low profitability of European banks, which it expects to worsen in 2019. It predicts that average return on equity (ROE) will sit around six percent in 2019, well below investors’ expectations of double-digit ROE. The ECB also warned that potential credit downgrades in the wake of a recession could drive up banks’ funding costs.
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