Citi analysts are warning that the euro area could suffer a meltdown on the same scale of the meltdown a decade ago, according to a report by CNBC. The main threat they identified to the bloc’s stability was Germany’s massive energy relief plan.
The report noted that Wall Street bank analysts are growing worried over the plans by European governments to borrow vast sums of money as well as violent bond market moves being seen of late.
They noted the €200 billion ($195 billion) relief package from German Chancellor Olaf Scholtz, aimed at blunting the impact of soaring energy prices “may soften the coming recession but also poses risks.” They note, it is unclear how the package is going to be financed and what that might do to inflation, nor is it clear the effect it will have on sovereign bond yields. Also in question is the effect on the European Central Bank’s benchmark rate, as well as the plans of other European nations to also possibly follow suit.
Christian Schulz, deputy chief European economist at Citi said, “The risk is that others may follow that example,” noting the recent bond market meltdown in Britain after the government there offered unfunded tax breaks in the widely-panned “mini-budget.”
Schulz went on to note that Germany could afford debt financing due to the low debt to GDP ratio of the heavily industrialized nation, and its lower external funding requirements. However the package could induce other, less economically capable countries to want to borrow similarly to get themselves through this crisis, and that could lead to problems, as was seen in Britain.
Citi’s analysts predict that Germany’s debt financing could also cause the European Central Bank to tighten its monetary policy across the entire bloc, which would then send yields soaring throughout the euro area. Schulz warned, “The risk is that this same dynamic [as occurred in Britain] evolves on the continent as well now.”
Amid this warning, Saxo Bank released data showing that an ECB stress indicator that shows overall health for the entire eurozone financial system, taking into account tensions in bond, equity and money markets, has risen from 0.1 at the beginning of the year to 0.5 now. Saxo bank notes that the index had just exceeded 0.6 during the 2009-2010 Eurozone debt crisis.
