The European Central Bank warns the Middle East conflict could trigger systemic financial stress, derail markets and amplify risks in the non-bank sector.
FRANKFURT: The escalating Middle East war poses a significant threat to global financial stability and could spark systemic stress.
European Central Bank Vice President Luis de Guindos issued the stark warning in a speech on Thursday.
He stated the conflict threatens to derail market sentiment at a time when asset valuations are already high. De Guindos added it risks “amplifying stress in the non-bank financial sector”.
“This conflict could trigger the unravelling of interconnected vulnerabilities and cause systemic stress,” he said. The turmoil comes amid existing worries over a tech stock bubble and the private credit sector’s health.
Markets have been roiled since US-Israeli attacks on Iran sparked the war last month. Stocks have fallen while oil and gas prices have jumped significantly.
Iran has declared the Strait of Hormuz closed to shipping from countries it considers allied with the US and Israel. This vital sea lane normally transports about a fifth of the world’s oil and gas.
De Guindos warned the global economy “was facing a supply shock” with “far-reaching repercussions”. The scale of the impact will depend on how much the war spreads and how long it lasts.
However, he noted that spillovers to the euro area financial sector have so far remained contained. ECB President Christine Lagarde also addressed the situation on Wednesday.
Speaking in Frankfurt, Lagarde suggested any inflationary shock could be less intense than the one following Russia’s invasion of Ukraine in 2022. Traders are now betting on an ECB interest rate hike as soon as next month.
They aim to tame an expected surge in inflation driven by the conflict.
