Banks warn of the consequences of a gas embargo

The war in Ukraine makes economic prospects bleak. The much-discussed energy embargo could hit Germany even harder, the banking association now warns.

In view of the alleged war crimes committed by Russian soldiers in the Bucha suburb of kyiv, calls to freeze Russian gas supplies are growing louder. However, there are also prominent voices who continue to oppose such a gas embargo, such as Christian Sewing, head of Deutsche Bank and president of the Association of German Banks (BdB).

“Emotionally, I can accept any embargo demand and we need to look into it further,” Sewing told the BdB board meeting on Monday. At the same time, he warned of an “enormous risk” for the German economy.

“Then it would be almost impossible to avoid a clear recession in Germany,” Sewing continued. In any case, it is already clear that the economy will be significantly affected by the war in Ukraine. “The chief economists of the private banks have halved their forecast with respect to the estimates prior to the outbreak of the war”, explained the president of the BdB.

Lower growth expected for the current year

Growth of only around two percent is now expected by 2022, which will further delay the return to the pre-corona level. And even this forecast is subject to change. Because significant risks, such as energy prices in the first place, have not yet been included in the calculation.

“Global retail and supply chains are being tested once again,” Sewing said. He referred to the new lockdown measures in China in the wake of the corona pandemic.

In addition, inflation rates in the euro zone would continue to rise. “At over seven percent, they are likely to reach a level in this six-month period that was beyond our imagination a short time ago.”

The embargo could lead to higher inflation

Sewing believes even higher rates are likely in the event of a power embargo. In March, inflation in the euro zone hit a record 7.5 percent, well above the European Central Bank’s (ECB) inflation target of two percent.

According to Sewing, the immediate economic risks of the Ukraine war are manageable for German banks. German financial institutions had already started to significantly reduce their business in Russia as early as 2014, he said: “So the commitment today is usually very manageable.”

According to BdB CEO Christian Ossig, loans from German banks amounted to 7.5 billion euros at the end of November. That’s 0.4 percent of banks’ total foreign assets.

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