Central Banks

ECB warns that risks of global market corrections have ‘intensified’

European Central Bank (ECB) President Mario Draghi addresses a news conference at the ECB headquarters in Frankfurt, Germany, March 10, 2016.
Kai Pfaffenbach | Reuters

The increasing political uncertainty across advanced economies is risking the stability of the euro zone, the region's central bank warned in a new biannual report on Thursday.

The uncertainty surrounding upcoming key referendums and elections across the 19-member euro zone bloc, along with expected policy changes in the U.S. raise inflation and growth challenges for euro area countries, the European Central Bank (ECB) said. Such uncertainty could lead to a global asset market corrections, it stated.

"The financial stability implications for the euro area stemming from changes in U.S. economic policies are highly uncertain at this point in time," the bank said.

"The euro area economy may be directly impacted via trade channels and by possible spillover effects from higher interest and inflation rate expectations in the U.S.," it added, hinting at the election win for Donald Trump and increased market expectations regarding his investment expenditure.

"Market movements after the U.S. election indicate a rotation from bonds to equities. Bond valuations declined by 1 trillion euros ($1.06 trillion) worldwide in the first week after the election, with European markets also being affected, albeit to a smaller degree than U.S. markets. It is uncertain whether these developments will set a trend for the future."

However, it added that European banks are also a current risk to the bloc's financial stability. Profitability is set to remain low given the moribund economic recovery and the high-level of non-performing loans remains to be addressed, it added.

"Risks extend also to the real economy. In particular, concerns about debt sustainability might re-emerge despite relatively benign financial market conditions," the ECB also warned.

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