November 30, 2022


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German relief plan could lead to UK-style bond collapse

German relief plan could lead to UK-style bond collapse

German Chancellor Olaf Scholz announced last week a €200 billion ($198 billion) package designed to help drive up energy prices. The “Defensive Shield” includes gas price braking and a reduced sales tax on fuel.

Stevie Luce | pool | Reuters

Amid pessimistic forecasts of a recession in Germany and the broader region, analysts at a Wall Street bank shared broader concerns about violent bond market moves and European governments looking to borrow huge sums of money.

German Chancellor Olaf Scholz announced last week a €200 billion ($198 billion) package designed to help drive up energy prices. The “Defensive Shield” includes gas price braking and a reduced sales tax on fuel.

The proposals may cut two percentage points of inflation next year, according to Citi, but are unlikely to prevent an economic downturn. Citi analysts said in a note released last Friday that the package “may ease the next recession but also pose risks, in our view.”

Those risks relate to the question of how the package would be financed and what that might do to inflation, Germany’s sovereign bond yields, the European Central Bank’s benchmark interest rate, and the borrowing plans of other euro countries that might do the same.

Germany example

“The risk is that others may follow that example,” Christian Schulz, Citi’s deputy chief European economist, told CNBC.Street signs in Europe” on Monday.

Schulz referred to the UK talk Bond market explodes after tax cuts not funded by the British government. Expectations for interest rates and bond yields in Britain rose last month after a series of tax announcements. caused the Bank of England to launch a new bond-buying scheme, Chaos in the mortgage market and talk about the housing crisis.

Schulz said Germany could “take on” any debt financing thanks to its low debt-to-GDP ratio and lower external financing needs, but the package could open the door for less fiscally prudent countries to want to borrow large sums and issue new debt – potentially resulting in Problems such as those seen in the UK Citi expects German debt financing may also force tighter ECB policy, which could also lead to higher yields in the Eurozone.

“The danger is that this same dynamic [seen in Britain] It is developing on the continent as well now,” Schulze said.

“Method [Germany] Wants[s] To do this by using an existing SPV [special purpose vehicle]an off-balance sheet fund….whether that will lead to borrowing or whether it will lead to secured loans – because this fund can do both – we’ll see,” he said, referring to the €200 billion plan.

German Federal Audit Court criticize the government She suggested she evaded tax rules to fund the package, according to Politico.

Banks and other institutions have pointed to the challenging environment in Germany – Europe’s largest economy and engine room for eurozone growth – which is now surprisingly trying to phase out Russian fossil fuels.

Berenberg Economics said in a recent note that consumer confidence in Germany, and the eurozone in general, had fallen to a record low, and said it was a “prelude to recession.” In fact, the Institute for Economic Research projects that investment will fall by 25% and predicts a German recession in 2023.

Deutsche Bank analysts estimate that the “defensive shield” could boost household incomes and limit the expected decline in GDP in 2023 to around 2%. This is better than their previous forecast of a 3.5% contraction.

The stagnation may be on paper

European Central Bank President Christine Lagarde has hinted at further rate increases, saying on September 28 that the bank is “not yet neutral at rates”.

Economist warns of more pain in the pipeline for Germany

Speaking at the Frankfurt Forum, Lagarde said the recent increases – most recently an unprecedented 75 basis point increase in September that destroyed the region’s record of negative rates – were just “the first destination in the journey”. The president of the European Central Bank said that the institution “will do what [it has] To do so” in order to return to the 2% inflation target over the medium term.

While the EU and US will see positive growth overall this year, “there are signs of a slowdown and a recession can no longer be ruled out,” European Commissioner for the Economy Paolo Gentiloni told CNBC’s Annette Weisbach at the Frankfurt Forum. “We are entering a phase of stagnation and potential stagnation,” Gentiloni said via video link.

This view was echoed by WTO Director-General Ngozi Okonjo-Iweala. “My concern is that all the indicators are going in the wrong direction,” Okonjo-Iweala told CNBC’s Juliana Tattlebaum in Brussels at an emergency energy meeting last month, but said she was not in favor of the word “recession.”

“Let’s say ‘slow down’ and let’s say we’re slowly going towards ‘R’,” she said.

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