ECB Warns There Is "Significant Risk Of Abrupt Market Reversal"

www.zerohedge.com

One week after the BIS issued an unexpectedly stern, if completely ignored warning, that the surge in the USD is leading to an abrupt tightening in financial conditions around the globe, making the repayment of trillions in USD-denominated cross-border debt increasingly more difficult and suggesting that the Dollar index itself is the new "fear indicator", overnight another central bank, the European Central Bank warned that the risk of "abrupt" global asset market corrections "have intensified" on the back of rising political uncertainty, posing a threat to banks, stability and economic growth.

“More volatility in the near future is likely and the potential for an abrupt reversal remains significant amid heightened political uncertainty around the globe and underlying emerging market vulnerabilities,” the ECB warned in its twice-yearly Financial Stability Review published on Thursday.

“Elevated geopolitical tensions and heightened political uncertainty amid busy electoral calendars in major advanced economies have the potential to reignite global risk aversion and to trigger a major confidence shock.”

In its report, the ECB warned about the recent period of dramatic, unexpected political results that started with the Brexit vote and culminated with Donald Trump’s victory, which have increased volatility and herald profound economic-policy changes whose implications for the euro area are still hard to gauge.  

“Financial stability implications for the euro area stemming from changes in U.S. economic policies are highly uncertain at this point in time.”

The Central bank noted out that while the currency bloc’s economy and financial system have remained resilient so far, more political instability in coming months may put pressure on weak banks and countries with high sovereign debt.

The ECB also focused on domestic banks and admitted that “vulnerabilities remain significant for euro-area banks,” confirming the ongoing Deutsche Bank lament that “profitability prospects overall remain low across the euro area in a subdued economic growth environment.” The good news is that - largely unexpectedly - the Trump victory has spurred a pick-up in bank stocks as investors saw the risk of ever tighter regulation recede. If sustained, this would “provide some support for euro area banks’ profitability prospects,” according to the ECB. The ECB also said that steeper yield curves “may provide some support for euro-area banks’ profitability prospects."

The good news is that “despite relatively volatile global financial markets, bank and sovereign systemic stress indicators for the euro area have remained fairly stable at low levels.”

The ECB also warned about the risk of a return of market pressure on the region’s highly-indebted countries as the spread of populism hinders reforms. “Higher political uncertainty may lead to more domestically focused, growth-hindering policy agendas,” the report said. “This, in turn, could delay much needed fiscal and structural reforms and could in a worst-case scenario reignite pressures on more vulnerable sovereigns” and that “concerns about debt sustainability might re-emerge despite relatively benign financial market conditions.”

It also cautioned about Europe's failure to address its hundreds of billions in NPLs, noting that “banking sector structural challenges stem from high stocks of non-performing loans, high operating costs and excess capacity, with different incidence across countries.”

Speaking at a press conference in Frankfurt, ECB Vice President Vitor Constancio said that “we are in a new phase of weaker world trade” and that “if, on top of that, there would be a wave of protectionist measures, world trade, and world growth would suffer.”  Constancio confirmed that the despite the risk build-up, the ECB still sees euro-area growth around 1.6 percent in 2017, with inflation rising to about 1.25 percent in the spring. Even so, he stressed that some of the region’s lenders remain weak and need to continue addressing excessive costs and a high burden of non-performing costs.

Ultimately, the ECB threw the problem at the politicians' feet, warning them that if they succumb to "populist" whims, i.e., democracy, then all bets are off and the ECB's "whatever it takes" will be retracted: “Higher political uncertainty may lead to more domestically focused, growth-hindering policy agendas. This, in turn, could delay much needed fiscal and structural reforms and could in a worst-case scenario reignite pressures on more vulnerable sovereigns.”

on.cc東網專訊

【on.cc東網專訊】 據外國傳媒報道，歐央行警告，隨着發達國家政治風險不斷升溫，加上美國通脹上揚令貨幣政策出現變化，已危害歐元區穩定及經濟增長。這不確定因素可以令到「全球」資產市場調整，而且可能性正在強化。

歐央行明確指出：「美國經濟政策轉變，會影響歐元區的金融穩定，今次是高度不確定，因歐元區貿易可能會受美國加息及通脹升溫預期而產生溢出效應。自從美國候任總統特朗普當選後，全球債市1周已蒸發1萬億歐元，歐元區也受累。」

歐央行承認，歐洲銀行正受到考驗，歐元區經濟復甦脆弱及壞帳處於高位，將影響盈利能力，最終風險將蔓延至實體經濟，尤其是債務穩定程度。

「溢出效應」是指某事物的發展帶動了其他方面的發展。