[ECB raises interest rates] The European debt problem is about to come?

On July 21, the European Central Bank officially raised interest rates by 0.5%, ending the era of negative interest rates for nearly a decade.

The debt burden of most countries in Europe has remained high for many years, especially the former "European pig countries" such as Italy and Portugal, can they withstand the test of raising interest rates?

The global foreign exchange market is turbulent. Since the US Federal Reserve has initiated a rare step of raising interest rates and collecting water in many years, the exchange rate of the US dollar is unparalleled in the world this year, rising to the highest level in more than two decades, overwhelming other currencies. Among them, the exchange rate of the euro against the US dollar fell to parity "1" : 1" level for the first time since 2002.

The current reason for the sharp depreciation of the euro is not only due to the Federal Reserve's aggressive expectation that it will have the opportunity to raise interest rates by more than 3% this year, but the more dominant factor is the impact on global energy and food supply since the beginning of the Russian-Ukrainian war at the beginning of the year.

"Gas shortage" has become a problem for the European economy. Economists at Morgan Stanley predict that Russia's cut in energy supply to Europe will lead to a recession in the euro area in the fourth quarter of this year, and it is believed that it will last for two quarters.

For the first time since 2002, the euro fell to a parity level of "1:1" against the dollar.

(Getty Images)

At present, the negative impact of the energy crisis on Europe has become a situation that is difficult to rewrite. In the negative cycle of "energy shortage - soaring inflation - central bank raising interest rates - economic regression", the market's pessimistic expectations for the euro have further increased.

George Saravelos, global head of foreign exchange research at Deutsche Bank, said the euro fell sharply, especially in the case of the complete shutdown of the Nord Stream 1 pipeline.

Citigroup analysts also recommend that investors go all out to short the euro.

Short selling the euro has now become one of the most popular trades for foreign exchange investors on Wall Street.

While the euro has fallen to a two-decade low, debt yields in European countries are gradually pumping up.

Italy's benchmark 10-year government bond yield rose as high as 4% last month for the first time since January 2014. The gap with Germany's bond yields widened further, the widest since the European debt crisis. Level.

Wang Jinbin, a professor at the School of Economics at Renmin University of China, said that the main reason for the debt crisis in the euro zone is that the bond market in Europe is fragmented. For some economies with poor finances, when their sovereign bond yields rise rapidly, the cost will rise sharply. .

Debt risks may arise in Italy, for example.

In this regard, the ECB's solution includes outright purchases of Italian bonds, reducing bond yields and preventing it from falling into a vicious debt spiral.

[ECB raises interest rates] European debt crisis 2.0 brewing?

For details, please read the 326th issue of "Hong Kong 01" Electronic Weekly Newsletter (July 18, 2022) "