synopsis
European Central Bank Vice President Luis de Guindos warned on Monday that volatile financial markets could lead to disorder, and trade wars may lead to credit risks.
"Sharp adjustments in financial markets could become disorderly, particularly if they are amplified by the growing size and influence of non-bank financial institutions. In addition, trade conflicts could pose challenges for both households and corporates, translating into rising credit risk for banks and non-banks alike,” he said while presenting the ECB’s 2024 Annual Report before European lawmakers.
A combination of weaker growth and heightened spending needs could increase pressures on government finances, he added.
Guindos also stressed the need for an effective crisis management and deposit insurance framework that extends to small and medium-sized banks, as well as progress on a European deposit insurance scheme.
“The recent financial market turmoil also highlights that non-banks must be subject to robust rules, and that gaps in the regulatory framework need to be closed so they are not treated differently to [sic] regular banks,” he said.
The ECB official expects inflation to hover around the central bank’s target but warned that global trade disruptions are adding uncertainty to the inflation outlook.
“Declining energy prices, further wage moderation and a stronger euro could dampen inflation, potentially amplified by weaker demand for euro area exports and a re-routing of other countries’ exports into the euro area,” he stated. “Conversely, a fragmentation of global supply chains could raise import prices and hence inflation.”
Earlier on Monday, U.S. Treasury Secretary Scott Bessent highlighted the strengthening of the Euro against the dollar since the tariff wars commenced and said that European countries are likely to be in panic given the strengthening of their currency.
“You’re going to see the [European Central Bank] start cutting rates to try to get the Euro back down,” Bessent stated. “Europeans don’t want a strong euro. We have a strong-dollar policy.”
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