The war in Ukraine, which has accelerated soaring commodity prices, poses difficult challenges for central banks, which will have to strike a balance between controlling inflation and protecting the post-pandemic economic recovery.
The warning comes from the International Monetary Fund (IMF), which wrote in its Global Financial Stability Report that although so far “no global systemic event” has occurred that could affect financial institutions or markets, “the fallout from the war remains.” Echoes is global and will test the resilience of the financial system through multiple channels, including exposure by banks, financial intermediaries and corporations, market disruption, increased counterparty risk, and potential cyber events.”
So policy makers must take “decisive measures” to control the general rise in prices, trying to prevent “financial vulnerabilities” and at the same time avoiding uncontrolled tightening of financial conditions, which could jeopardize the post-pandemic economic recovery.
The IMF warns that in the process, “some businesses and families may need short-term budget support to be able to weather the fallout from the war.”
Bank with “modest” exposure
On the positive side, the institution notes that global banks’ direct exposure to Russia and Ukraine “appears to be relatively modest”. In the third quarter of 2021, foreign financial institutions demanded 120 billion US dollars from Russian residents (60% of it in foreign currency). In the case of Ukraine, the exposure was $11 billion. The vast majority of these securities were held by eurozone banks.
The IMF adds, without specifying specific banking institutions, that “these exposures are important in some countries from an economic point of view, because they have banks that have an active role in the Russian financial system.”
Reversals in the transmission of energy
In the document, the fund led by Kristalina Georgieva also wrote that due to the war, and the European intention to reduce dependence on Russia, the “energy transition strategy may face setbacks” and asserts that “some countries have already indicated their intention to bet on fossil fuels and electricity production from coal to secure their energy needs.” Short term “.
Therefore, governments will “face a set of structural challenges” that include “changing the perception of the balance between energy security and climate transition”, at a time “rising commodity prices and supply disruptions are leading to a more costly and complex transition to renewable energy”, but also “the fragmentation of capital markets”. money, with the long-term effects this may have on exchange rates.” These are issues, the experts write, “extremely complex in a world where geopolitics plays a central role in asset allocation, and uncertainty prevails.”