Energy crisis raises concerns for financial stability, ECB's Panetta warns

By Giuseppe Fonte

ROME, April 2 (Reuters) - Tensions in the energy markets due to the U.S.-Israeli war on Iran are a cause of concern for their potential repercussions on financial stability, European Central Bank Governing Council member Fabio Panetta said on Thursday.

Addressing a conference in Rome, Panetta said changes in global investors' risk perception could quickly lead to pressure on government bonds, especially given high levels of public debt in many economies, such as Italy.

"There are already signs pointing in this direction, as the rise in the value of the dollar, pressure on long-term interest rates and capital outflows from emerging markets reflect a growing preference for safer assets," he said.

At the same event, Foreign Minister Antonio Tajani said the war could boost migration flows if the Strait of Hormuz, normally the conduit for large amounts of fertiliser for Africa in particular, as well as oil and gas, remained largely blocked.

Panetta also warned about liquidity and leverage levels in non-bank financial institutions, with investors having growing concerns about the U.S. private credit sector.

Even if there were a swift end to the war, which has embroiled the whole Gulf region, a return to normal production would take time, Panetta said, pointing to more pessimistic ECB scenarios that energy supply would recover in the fourth quarter of 2026 or in 2027.

Euro zone inflation rose sharply to 2.5% in March from 1.9% in February as energy prices surged.

These data "highlight the intensity and speed with which the energy shock is being transmitted, whose effects are also likely to be reflected in the data for the coming months as well", Panetta said.

"At the same time, the trend in leading indicators, in particular the decline in household confidence, points to a possible slowdown in the real economy."

Despite the darkening outlook, both Panetta and Tajani said Italy was in a better position now than when Russia began its war on Ukraine in 2022, as investors had a more favourable perception of Italy's public finances.

"This has kept us safe so far," Panetta said. (Reporting by Giuseppe Fonte; Editing by Emelia Sithole-Matarise and Kevin Liffey)