According to the latest Global Financial Stability Report from the International Monetary Fund, geopolitical tensions have reached their highest levels in decades, with wars and trade disruptions dragging down stock prices and sending borrowing costs higher — especially in emerging market economies.
“Geopolitical risks… have risen notably in recent years,” the IMF’s report says, pointing to increased military spending, a surge in trade and financial sanctions, and rising uncertainty in major economies. It’s not just the conflicts themselves — it’s the growing sense that no corner of the global economy is immune.
Stocks Take a Hit, Especially in Emerging Markets
Stock markets typically don’t like surprises — and geopolitical flare-ups are some of the hardest shocks for investors to predict. The IMF found that while global stock indices usually dip about 1% following a major geopolitical event, the fall is often sharper in emerging markets, averaging around 2.5%. And when an international military conflict is involved, that monthly loss jumps to 5% for these economies.
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Military conflicts have a “disproportionately larger and more persistent effect on asset prices,” the report finds. The hits to investor confidence and business activity tend to be more severe in countries with less fiscal space, limited access to global capital, or weaker institutions.
The damage also spreads across borders. If a country’s main trading partner is pulled into conflict, its own markets can react just as harshly. On average, firms in such countries see their stock prices fall by around 2.5%. “The impact is more pronounced… when a country’s main trading partner is involved in a military conflict,” the IMF writes.
Government Borrowing Gets More Expensive
It’s not just equity markets. When geopolitical risks spike, governments — especially those in the developing world — suddenly find themselves paying more to borrow. Sovereign credit default swaps, which serve as a kind of insurance premium against a country defaulting, tend to rise about 30 basis points in advanced economies. In emerging markets, that increase can be as much as four times higher.
In cases involving military conflict, spreads widen by 40 basis points in advanced economies and a striking 180 basis points in emerging markets within just one month. These jumps reflect growing worries over whether governments can keep up with spending — often rising due to war-related costs — without tipping into fiscal trouble.
Countries with high public debt, low reserves, and weak institutions are particularly exposed. “Sovereign risk premiums increase more in emerging market economies with high public-debt-to-GDP ratios,” the report says.
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Volatility Spikes and Lending Slows
Geopolitical shocks also rattle broader financial stability. The Chicago Board Options Exchange’s Volatility Index (VIX), a closely watched gauge of market stress, tends to spike after major events, driven by rising uncertainty rather than just risk aversion.
This nervousness can then work its way through the financial system. Banks tend to lend less. Investment funds face redemptions and lower returns. In the worst cases, markets could spiral into self-reinforcing downturns, with sharp drops in asset prices triggering further cuts to credit and investment.
What Can Be Done?
Though geopolitical risks often seem unpredictable and uncontrollable, the IMF argues that countries and financial institutions can — and should — be better prepared.
Banks and regulators, the report says, must “allocate adequate resources to identify, quantify, and manage geopolitical risks,” through stress tests and scenario planning. Institutions should hold enough capital and liquidity to weather market shocks.
Emerging and developing economies, meanwhile, should continue efforts to strengthen their financial markets and improve oversight. And countries with lower buffers — including fiscal reserves and international holdings — need to build more space to absorb future shocks.
There’s also a clear message for investors: geopolitical risks are not going away. And while not every event will spark a crisis, ignoring these risks could prove costly. As the IMF puts it plainly, “major geopolitical risk events can trigger large and persistent corrections in asset prices,” with fallout that spreads far beyond the battlefield.
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