Trump poses threat to European markets, ECB warns

Posted on November 24, 2016

The European Central Bank has warned of the risk of a rout in Europe’s markets, saying political instability in the US could infect investor sentiment around the world and trigger a further surge in borrowing costs for eurozone governments.

Borrowing costs for governments have risen throughout the world after the election of Donald Trump as the next US president. The ECB said that, while the implications of Mr Trump’s election for the euro area remained “highly uncertain”, the risks of “further asset price corrections” in bond markets remained significant.

“The world has changed a little bit,” said Vítor Constâncio, vice-president at the ECB, as the bank published its latest Financial Stability Review. “This risk [of political uncertainty] has risen.”

Fragile emerging market economies were also at risk, the bank said in the six-monthly report.

The bank’s warning raises the stakes ahead of a crucial meeting of the central bank’s governing council on December 8, when the bank is expected to give details of a third leg of its quantitative easing programme to try to revive the eurozone’s economy.

The report highlights the risk that a move to cut back on asset purchases in the current climate will trigger a sharp rise in borrowing costs — undoing the work done by the QE programme in lowering interest rates across Europe.

Markets believe Mr Trump will unveil a big package of fiscal stimulus to lift growth in the US. The package is likely to raise inflation, triggering a series of rate hikes by the Federal Reserve and a stronger dollar.

While Mr Constâncio said higher growth and inflation would justify higher borrowing costs for the US government, the situation in Europe — where the economy is much weaker — was different.

“If bond yields go up because there is the prospect suddenly that growth and inflation increase … then that’s a positive development,” the ECB vice-president said. “The risk is, of course, that this situation would be more true in the US and less true in Europe and other parts of the world.”

Mr Trump’s coming term as US president is just one of several political risks facing the eurozone.

Pressure on policymakers in Frankfurt is set to mount if Matteo Renzi, Italy’s prime minister, loses a national referendum on constitutional reform on December 4. A No vote could prompt Mr Renzi’s resignation and trigger a political crisis while the Italian government’s borrowing costs would probably climb further.

Mr Constâncio flagged the recent rise in government borrowing costs had been much greater in Italy than in other eurozone states.

The ECB vice-president said it was “impossible to predict” how a No vote would affect the eurozone, but said Italy’s banks were more resilient now than during the early stages of the global financial crisis.

Mr Constâncio also reiterated his concern about the impact of a Trump presidency on trade with the US. “We are in a new phase of weaker world trade,” he said in a press conference. “If, on top of that, there would be a wave of protectionist measures, world trade and world growth would suffer.”

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