ECB’s Knot: Growth Outlook Worsened, Challenging Prospects for Sustained Recovery

11 May 2022

By David Barwick – FRANKFURT (Econostream) – The war waged by Russia against Ukraine raises questions about the sustainability of the recovery path the economy had been on after emerging from the worst of the pandemic, European Central Bank Governing Council member Klaas Knot said Wednesday.

In remarks at the ISDA 36th Annual General Meeting, Knot, who heads De Nederlandsche Bank, said ‘The near-term growth outlook has deteriorated, challenging the prospects for a sustained and broad-based recovery from COVID-19. At the same time, inflation has returned, and with it the prospects of tighter global financing conditions.’

The financial system has nonetheless handled the shock of Russia’s aggression against Ukraine well, helped in part ‘by the recent experience of the pandemic, with the bold international policy response and the demonstrated resilience of the core of the global financial system’, he said.

‘Yet, global financial stability cannot be taken for granted’, he said. ‘There is no room for complacency given the highly uncertain and rapidly evolving situation.’

Recent weeks have shown that volatile commodity prices can cause financial tensions that ‘may have a disproportionately large macroeconomic impact’, he said. ‘There may also be spill-over effects onto the broader financial system.’

Undetected leverage is another concern, he said, with ‘certain banks, particularly prime brokers … prepared to take large positions without having sufficient visibility into the total leverage of their counterparties.’

The questions about transparency and risk management this raises ‘are particularly discomforting in an environment of high debt levels globally, and the prospect of tighter financing conditions’, he added.