French bonds hit record gap amid crisis

The gap between German and French sovereign borrowing rates widened to a record on Thursday and the 10-year cost of borrowing for Italy reached a record briefly above 6.402 percent.

French bonds hit record gap amid crisis
Photo: DPA

The Germany-France spread on 10-year borrowing rates, a critical pressure point in the eurozone, widened to 1.358 percentage points and the Italian rate, which eased to 6.319 percent, puts Italy borrowing costs close to unsustainable levels.

Germany and France are the economic and political pillars of the eurozone, and France which trails Germany in economic performance is anxious to hold on to its top AAA credit rating.

A widening of the spread between German and French rates is a sign of tension at the heart of the eurozone.

In recent days, funds have moved into buying German debt as a defence in times of great uncertainty over the eurozone and Greek debt crises.

Meanwhile, the price of French bonds has eased, pushing up the fixed rate on French bonds as a percentage of the new price. This has widened the gap or spread.

The immediate critical pressure point in the eurozone is the borrowing rate indicated for Italy as funds move out of Italian bonds, pushing up the fixed yield.

The shock decision by Greece to hold a referendum on a complex eurozone-Greek debt package has raised openly the possibility that Greece might leave the eurozone, or might be forced into a disorderly default on its debt payments.

This has raised a range of uncertainties on financial markets, for example about the ability of many European banks to absorb any repercussions from a Greek default if it occurred. This has therefore refocused attention on the debt of other countries in the eurozone considered to be weak.

Countries already being rescued alongside Greece are Ireland and Portugal, but the main concerns are Italy, with the third-biggest economy in the eurozone and a huge debt mountain, and Spain.

The European Central Bank has been supporting the weaker countries, by buying their debt from banks and financial companies and also by providing finance on a regular basis to prop up banking systems.


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German consumer prices set to rise steeply amid war in Ukraine

Russia's war in Ukraine is slowing down the economy and accelerating inflation in Germany, the Ifo Institute has claimed.

German consumer prices set to rise steeply amid war in Ukraine

According to the Munich-based economics institute, inflation is expected to rise from 5.1 to 6.1 percent in March. This would be the steepest rise in consumer prices since 1982.

Over the past few months, consumers in Germany have already had to battle with huge hikes in energy costs, fuel prices and increases in the price of other everyday commodities.


With Russia and Ukraine representing major suppliers of wheat and grain, further price rises in the food market are also expected, putting an additional strain on tight incomes. 

At the same time, the ongoing conflict is set to put a dampener on the country’s annual growth forecasts. 

“We only expect growth of between 2.2 and 3.1 percent this year,” Ifo’s head of economic research Timo Wollmershäuser said on Wednesday. 

Due to the increase in the cost of living, consumers in Germany could lose around €6 billion in purchasing power by the end of March alone.

With public life in Germany returning to normal and manufacturers’ order books filling up, a significant rebound in the economy was expected this year. 

But the war “is dampening the economy through significantly higher commodity prices, sanctions, increasing supply bottlenecks for raw materials and intermediate products as well as increased economic uncertainty”, Wollmershäuser said.

Because of the current uncertainly, the Ifo Institute calculated two separate forecasts for the upcoming year.

In the optimistic scenario, the price of oil falls gradually from the current €101 per barrel to €82 by the end of the year, and the price of natural gas falls in parallel.

In the pessimistic scenario, the oil price rises to €140 per barrel by May and only then falls to €122 by the end of the year.

Energy costs have a particularly strong impact on private consumer spending.

They could rise between 3.7 and 5 percent, depending on the developments in Ukraine, sanctions on Russia and the German government’s ability to source its energy. 

On Wednesday, German media reported that the government was in the process of thrashing out an additional set of measures designed to support consumers with their rising energy costs.

The hotly debated measures are expected to be finalised on Wednesday evening and could include increased subsidies, a mobility allowance, a fuel rebate and a child bonus for families. 

READ ALSO: KEY POINTS: Germany’s proposals for future energy price relief

In one piece of positive news, the number of unemployed people in Germany should fall to below 2.3 million, according to the Ifo Institute.

However, short-time work, known as Kurzarbeit in German, is likely to increase significantly in the pessimistic scenario.