Geopolitical risks, including trade tensions, can cause significant declines in stock prices, which could threaten financial stability. About this it is said in the Global Financial Stability Report of the International Monetary Fund.
The IMF did not point to specific developments, such as sweeping new tariffs imposed by US President Donald Trump in recent weeks, but stressed that risks are rising from 2022 amid wars, increased defense spending and tighter trade restrictions.
The document emphasizes the need to provide financial institutions with a sufficient level of capital and liquidity so that they can cope with possible losses caused by geopolitical upheavals. The IMF also called for the active use of stress testing tools and other analytical methods to identify and manage such threats.
According to the study, large-scale events such as wars, diplomatic conflicts or terrorist attacks lead to an average monthly decline of 1 percentage point in stock markets globally. In countries with developing markets, this drop can reach 2.5 points.
The most powerful impact was observed in connection with the full-scale invasion of Ukraine by Russia in 2022. The event drove stock returns down an average of 5 percentage points per month — more than double the average decline caused by other similar risks.
The report also indicates that rising geopolitical tensions are driving up sovereign risk premiums, i.e. the cost of credit derivatives that insure against default. These effects can be transmitted to other countries through economic and financial ties.
We will remind you that last week the markets on Wall Street experienced the biggest fluctuations since the COVID-19 pandemic in 2020. The S&P 500 has fallen more than 10% since Trump’s inauguration on January 20, while the price of gold has hit all-time highs.
