German Chancellor Olaf Scholz last week announced a package worth 200 billion euros ($198 billion) designed to help with soaring energy prices.
Schulz said Germany could"afford" any debt financing thanks to its low debt-to-GDP ratio and lower external funding needs, but the package could open the door for less fiscally prudent countries to want to borrow large amounts and issue new debt — potentially leading to trouble like that seen in the U.K. Citi predicts that German debt financing could also force tighter ECB policy, which could then also send yields surging in the euro area.
"The way [Germany] want[s] to do it is by using an existing SPV [special purpose vehicle], an off balance sheet fund .... whether that's going to lead to borrowing or whether it's going to lead to guaranteed loans — because this fund can do both — we shall see," he added, referring to the 200 billion euro plan.and suggested it had dodged tax rules to fund the package, according to Politico.
Berenberg Economics said in a recent note that consumer confidence in Germany, and the euro zone more generally, has plunged to a record low, which it said is"a prelude to recession." Indeed, the Institute for Economic Research predicts investment will plummet by 25% and expects a German recession in 2023.
Speaking at the Frankfurt Forum, Lagarde said the latest hikes — most recently an unprecedented 75 basis point increase in September that demolished the region's track record of negative rates — were just"the first destination on the journey." The ECB president said the institution would"do what [it has] to do" in order to return to its 2% inflation target in the medium term.
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