European Central Bank sounds market alarm: Iran war may trigger systemic financial pressure.

Europe's Deputy Central Bank Governor, Luis de Guindos, stated on Thursday local time that the Eurozone banking system has limited direct exposure to the risks related to the Middle East geopolitics war, but given the fragile interconnectedness of global financial markets, this conflict could still lead to significant systemic pressures in the Eurozone financial markets. In recent weeks, the impact of the new round of warfare between the US and Israel against Iran has already put pressure on global financial markets, but the selling pressure outside the Middle East region remains relatively limited. Some core assets, including popular tech companies and AI super giants, are still overvalued. De Guindos said in a speech, "So far, the spillover effects to the Eurozone financial sector remain manageable." "Eurozone commercial banks have very limited direct exposure to that region, and the banking system, with its strong profitability and robust capital and liquidity buffers, still stands in a favorable position." De Guindos believes that even market infrastructures like central counterparty clearinghouses, which serve global energy markets and have been facing strong volatility, have effectively managed margin requirements. However, De Guindos pointed out that there are still broader risks due to the interconnectedness within the financial system. As one of his responsibilities within the ECB's Governing Council, monitoring the long-term stability of financial markets is crucial. He emphasized, "Given the already elevated uncertainty in the global financial system, this geopolitical conflict could trigger the unraveling of interconnected fragilities and lead to systemic pressures." He stated that this conflict could hit market optimism at a time when asset valuations are already high, resulting in a sharp repricing of asset valuation risks for leveraged borrowers and sovereign borrowers, while amplifying pressure on non-bank financial sectors. In ensuring low inflation, a core responsibility of the ECB, De Guindos reiterated the ECB's warning that this geopolitical conflict could significantly push up inflation and drag down Eurozone economic growth, but more time is needed to fully understand its impact. He said, "We remain firmly committed to ensuring that inflation remains stably on target at 2% in the medium term." Shortly before De Guindos' speech, ECB Governing Council member and Bundesbank President Joachim Nagel stated that if the war in Iran leads to further price pressures in Europe, the ECB may consider restarting the rate hike process as early as next month's monetary policy meeting. He recently said in a media interview, "From the current situation, it can be imagined that the medium-term inflation outlook may deteriorate, and inflation expectations may continue to rise, which means we may need to adopt a more tightening monetary policy stance." In its monetary policy statement last Thursday, the ECB stated, "The Middle East conflict has made the outlook more uncertain, bringing risks of upward pressure on inflation and downward risks on economic growth." "This conflict will have a substantial impact on short-term inflation through higher energy prices. The medium-term impact will depend on the intensity and duration of the conflict, and how energy prices transmit to consumer prices and the overall economy."