After the Federal Reserve raises interest rates, how will European bonds survive?

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Source: Li Jianqiu’s world (id:lijianqiudeshijie)

Let’s talk about the current dilemma of the European Central Bank in a few words to ensure that you can understand it:

1. It is known that the gap between the yield of German ten-year Treasury bonds and those of southern European countries has widened.

2. It is known that the higher the yield of national debt is, the higher the cost of borrowing money in this country.

3. That means that the borrowing cost of southern European countries has become higher, and when it becomes higher, the financial situation of southern European countries is still bad. So this is a vicious circle.

4. When the yields of German government bonds and those of southern European countries are increased to a certain extent, people will panic because they are afraid that southern European countries will sell their national bonds if they cannot afford it.

5. When a large number of sales are made, the bond yield of southern European countries will be higher, because your yield is too low to attract people to buy.

6. At this time, only the European central bank can save southern European countries, and they cannot save themselves. Southern European countries often borrow new debt to repay old debt. What if the interest rate is too high to afford it? Then it will go bankrupt.

7. Due to inflation, the ability of the European Central Bank to issue money has been restricted.

8. Then the Federal Reserve is ready to raise interest rates, which adds fuel to the fire in Europe.

Next, let’s analyze the situation in Europe:

After the outbreak of the COVID-19 in 2020, the monetary and fiscal cooperation in the euro zone was relatively good, and the European bond interest rate was generally low. The European Central Bank launched a fiscal stimulus plan with a total scale of 1.8 trillion euros, easing the market’s concerns about the debt of southern European countries.

Due to the epidemic, the EU announced that it would suspend its obligations under the stability and growth pact, that is, temporarily allow member states to exceed the red line of 60% debt ratio and 3% fiscal deficit ratio. By May this year, due to the Russia Ukraine war, the EU once again announced that in order to deal with the energy crisis, it would postpone it until 2023.

The lack of constraints, then the southern European countries can not just spread the rot? The debt ratio of euro zone member states has risen rapidly. The debt ratio of Greece and Italy has directly exceeded 193% and 150%. When the debt crisis broke out that year, the debt ratio of Greece was only 148% and that of Italy was only 119%.

Before the outbreak of the New Champions League, the fiscal deficit ratio of Italy and France was actually lower than 3%. After the New Champions League, both countries exceeded 7%, higher than that during the European debt crisis.

This is why I am not optimistic about the EU.

Let’s go back to Japan. From the data, Japan’s debt ratio is higher than that of the EU, but the problems of the EU are not limited to economic problems, but political problems. If the EU is really a country, nothing will happen.

Japan is a single nation-state, which is nothing more than a little more bitter. It depreciates more, but it can withstand it.

The EU is different. There are too many countries within the EU. Germany’s debt and fiscal situation are very good, while Greece and Italy are very poor.

According to the truth, Greece and Italy should live a hard life and have fiscal austerity.

The question is whether Greeks and Italians will do it? Why? Why should you German live a good life and I live a hard life?

“Because your debt and financial situation are poor.”.

I don’t care. They are all EU Member States. Why should you live a good life and I live a bad life?

If you don’t help me solve the problem today, lift the table

It was like this in those days. So it means whether Germany is willing to engage in large-scale fiscal transfer payments.

Will Germany? Look at this news:

In his speech at the European financial summit in Frankfurt on the 4th, Joachim Nagel, President of the German central bank, called on the European Central Bank to take stricter measures to reduce inflation before it became entrenched.

“Obviously, our current focus must be on the very high inflation rate. It is important to concentrate all our efforts to curb this high inflation level.” Nagel said.

Does the governor of the German central bank know that if interest rates are raised, Italy and Greece will collapse directly?

Will he know what I know?

Yes, but it’s none of my business – it’s your Italy and Greece, not my Germany.

This is the EU’s problem.

The problem of division within EU countries has always existed. Don’t watch the Germans sing high-profile all day long, such as European unity, but think about it carefully. How did the port of Piraeus in Greece fall into the hands of COSCO?

During the 2016 debt crisis, the Greek government first sold 51% of the shares to COSCO Piraeus port authority due to the need to urgently replenish the national treasury, and then planned to sell another 368.5 million euros worth of shares, about 16% in the summer of 2021.

Germany didn’t want to buy it, so COSCO bought it. After COSCO bought it, the Germans began to force Lai Lai to say why they sold the port to the Chinese people.

So every time I see German media mention this thing, I feel funny: I have to force Greece to repay its debts, and I am not willing to buy Greek assets. Greece sells to others and starts to beep. Are you German going to heaven?

Japan is a whole country. Everyone has no problem living a hard life together.

The EU is not.

The dilemma of the European Central Bank

The European Central Bank announced on June 9 that it would suspend its bond purchase plan in July and was ready to raise interest rates for the first time since the European debt crisis, which immediately triggered a panic selling of European debt. The interest rates of ten-year Treasury bonds of Germany, France, Spain, Italy and other countries rose sharply.

The European Central Bank was suddenly terrified, so the European Central Bank quickly held an emergency meeting on June 16 to solve the problem, and made all kinds of harsh words. After the words, the interest rates of Italian and other countries’ government bonds began to fall, and market sentiment began to ease.

Compared with the European debt crisis, the so-called “Financial Toolbox” of the European Central Bank is indeed much more, but in a word, it is just a few tricks: interest rate reduction, bond purchase, and expectation management.

The benchmark interest rate in the eurozone has been reduced from 1.5% in 2011 to 0% now. If the benchmark interest rate falls, the interest cost will fall.

Through asset purchase, the European Central Bank purchased government and corporate bonds of Greece, Ireland, Portugal and other high-risk countries from the secondary market to lower bond interest rates. This trick was used again during the COVID-19 in 2020, and launched the epidemic economic purchase plan. 97% of the assets were used to buy government bonds.

Finally, a direct currency trading plan was launched, promising that the central bank could purchase unlimited short-term government bonds of eligible member states, injecting expectations into the market.

After three moves, the European debt crisis of that year was alleviated.

But today is different from the past. In the past, no matter how the European Central Bank spent money, as long as inflation did not rise, it was not a problem. The rescue of the European Central Bank was actually a kind of spending money. The central bank spent money to stabilize the volatility of the bond market, stimulate economic growth, and stimulate the long-term recovery of low inflation in the European Union, which was widely praised at that time.

And now? Inflation has risen across Europe.

Under the premise that inflation has risen, continuing to spend money is tantamount to adding fuel to inflation.

Is it possible to solve the debt problem of southern European countries without raising high inflation?

There are only two ways:

First, the European Central Bank still holds some high-quality assets, such as German government bonds. It sells German government bonds and in turn buys those of southern European countries, driving down the bond yields of southern European countries. This is tantamount to transferring assets, without issuing additional currency and increasing additional liquidity.

Second, we should continue to announce policies to cover the bottom, engage in expectation management, and put pressure on speculators shorting European bonds.

The problem is:

First, if you sell high-quality assets and buy low-quality assets, will other countries, such as Germany, be willing? This is an obvious eccentric behavior of the European Central Bank towards southern European countries, and the president of the Bundesbank has made a public statement:


Joachim Nagel, President of the Bundesbank, warned that it was “almost impossible” to determine whether the differences in borrowing costs between eurozone countries were reasonable. He believed that relying on the support of the European Central Bank (ECB) would be “fatal” for governments.

This was Nagel’s speech on Monday, the first sign of serious differences within the European Central Bank over its plan – the European Central Bank plans to develop a new asset purchase tool to deal with the “unreasonable” surge in bond yields in more vulnerable countries after the start of interest rate hikes.

In fact, the concern of the president of the Bundesbank of Germany is not unreasonable. From 2020 to 2022, the European Central Bank has purchased 2.2 trillion euros of government bonds of Member States, basically digesting the debt increment of Member States. For those fragile countries, such as Greece, Cyprus and Italy, the scale of government bonds has been 285%, 283% and 135% of the increment of government bonds in the same period. The European Central Bank has bought too much. Do you want to buy now?

At present, the bundling of eurozone sovereign debt and the European Central Bank is getting deeper and deeper. Once a country has problems, the assets of a large number of European banks holding these debts will be seriously damaged, which will detonate in a chain like a mine.

Fortunately, the Fed will raise interest rates again. In the case of raising interest rates, capital will intensify its escape from the euro zone.

What kind of financial magic does the European Central Bank have this time? It is also worth learning from again.

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