Germany’s relief plan could trigger a UK-style bond meltdown in euro nations
German Chancellor Olaf Scholz last week announced a package worth 200 billion euros ($198 billion) designed to help with soaring energy prices. The “defensive shield” includes a gas price brake and a cut in sales tax for fuel.
Steffi Loos | Pool | Reuters
Amid downbeat predictions of a recession in Germany and the wider region, analysts at one Wall Street bank have shared wider concerns about violent bond market moves and European governments looking to borrow vast sums of money.
German Chancellor Olaf Scholz last week announced a package worth 200 billion euros ($198 billion) designed to help with soaring energy prices. The “defensive shield” includes a gas price brake and a cut in sales tax for fuel.
The proposals could cut 2 percentage points off inflation in the next year, according to Citi, but they are unlikely to prevent an economic contraction. The package “may soften the coming recession but also poses risks, in our view,” Citi analysts said in a note released last Friday.
Those risks relate to the question of how the package will be financed and what that could do to inflation, to Germany’s sovereign bond yields, to the European Central Bank’s benchmark rate, and to the borrowing plans of other euro nations that may do the same.
Germany’s example
“The risk is that others may follow that example,” Christian Schulz, deputy chief European economist at Citi, told CNBC’s “Street Signs Europe” on Monday.
Schulz noted the U.K.’s recent bond market blowup after unfunded tax cuts by the British government. Rate expectations and bond yields surged in Britain last month after a swathe of tax announcements. It caused the Bank of England to unleash a new bond-buying plan, mayhem in the mortgage market and talk of a housing crisis.
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 risk is that this same dynamic [seen in Britain] evolves on the continent as well now,” Schulz said.
“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.
Germany’s Federal Audit Court criticized the government and suggested it had dodged tax rules to fund the package, according to Politico.
Other banks and institutions pointed to the difficult environment in Germany — the largest European economy and an engine room for euro area growth — which is now trying to abruptly wean itself off of Russian fossil fuels.
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.
Deutsche Bank analysts estimate that the “defensive shield” could boost household income and limit the projected GDP decline in 2023 to around 2%. That’s better than their previous forecast of a 3.5% contraction.
Recession may be on the cards
ECB President Christine Lagarde hinted at further interest rate hikes, saying on Sept. 28 that the bank was “not at neutral rates yet.”
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.
While the EU and U.S. will see positive growth this year overall, “the signs are there of a slowdown and a recession can no longer be ruled out,” European commissioner for economy, Paolo Gentiloni, told CNBC’s Annette Weisbach at the Frankfurt Forum. “We are entering a phase of stagnation and possible recession,” Gentiloni said via video link.
That sentiment was echoed by World Trade Organization director-general Ngozi Okonjo-Iweala. “My worry is that all indicators are going in the wrong direction,” Okonjo-Iweala told CNBC’s Julianna Tatelbaum in Brussels at an emergency energy meeting last month — but she said she disliked the word “recession.”
“Let’s say ‘slowing’ and let’s say we are inching towards the ‘R’,” she said.
State-owned power company China Three Gorges Renewables Group will build an 8 GW solar farm as part of a nearly $11 billion integrated energy project.
To put the sheer size of the 8 GW solar farm in perspective, the three largest solar farms in the world by capacity are China’s Ningxia Tenggeli and Golmud Wutumeiren solar farms, with a capacity of 3 MW each, and a 3.5-GW solar farm outside Urumqi, Xinjiang’s capital.
In addition to the massive solar farm, the $10.99 billion project will also consist of 4 GW of wind, 5 GWh of energy storage capacity, 200 MW of solar thermal, and (disappointingly) 4 GW of coal-fired power. It will be sited in Ordos, in northern China’s Inner Mongolia region, the Shanghai-listed company said in a stock filing.
China Three Gorges says that the enormous integrated energy site’s power will be dispatched to the Beijing-Tianjin-Hebei cluster in northern China via an ultra-high voltage power transmission line.
The project will break ground in September and is expected to come online by June 2027.
China Three Gorges Renewables will take a 56% stake, and Inner Mongolia Energy Group will control 44%.
Read more: In a world first, China installs an 18 MW offshore wind turbine
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Environment
Hispano Suiza will do a hill climb and show off its new 1,114 hp Carmen Sagrera at Goodwood
Boutique electric hypercar developer Hispano Suiza announced it would return to the Goodwood Festival of Speed this month to showcase two of its latest vehicles. One on display will be its newest model, the Carmen Sagrera, which packs four motors that combine for 1,114 horsepower.
Hispano Suiza is a boutique automaker in Spain with well over a century of experience. Founded in 1904, the brand established a prominent reputation by producing luxury cars, aircraft engines, trucks, and weapons throughout the early to mid-1900s.
The brand has been revived in recent years with a keen focus on all-electric hypercars that deliver one-of-a-kind performance. Hispano Suiza’s venture into bespoke BEVs began in 2019 with the debut of the Carmen – a truly unique model of which only 24 examples were assembled, and no two are exactly alike.
As an encore, Hispano Suiza launched the even more exclusive Carmen Boulogne. Only five were built, and one was delivered to a customer in the US in 2023. It currently sits as one of the most expensive BEVs on the planet.
To complete the trifecta, Hispano Suiza teased a third hypercar called the Carmen Sagrera this past February as a driveable nod to its 120-year history in automotive design.
We only caught a glimpse of its massive spoiler at the time but got the full picture in June when the Spanish automaker officially debuted it to the public in Barcelona. Later this month, Hispano Suiza intends to debut the Carmen Sagrera in the UK for the first time during the annual Goodwood Festival of speed.
It is there that it also intends to do a famous hill climb in another one of its all-electric hypercars.
Hispano Suiza to compete (and show off) at Goodwood
According to news from Hispano Suiza today, it will return to the Goodwood Festival of Speed and bring along not one but two all-electric hypercars. The first will be the previously mentioned Carmen Sagrera, which will be presented to the media and authorities in the UK for the first time, including The Duke of Richmond, who founded the annual Goodwood event.
The new all-electric hypercar, piloted by former Formula 1 driver Luis Pérez-Sala, will pull out onto the stage of Hispano Suiza’s dedicated stand. The public will be able to see it up close and take advantage of a pre-sale of Hispano Suiza’s new Capsule Collection of branded merchandise.
Those hoping to see the Carmen Sagrera in action as Goodwood may be disappointed, as it will only be on display. However, the automaker shared that it intends to do a hill climb with Carmen Boulogne, which is a nice consolation.
This year’s Goodwood Festival of Speed will occur July 11-14. If you’re there, be sure to check out the new Carmen Sagrera in person and report back.
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