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FINANCE

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.

AFP/mdm

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ECONOMY

How is Denmark’s economy handling inflation and rate rises?

Denmark's economy is now expected to avoid a recession in the coming years, with fewer people losing their jobs than expected, despite high levels of inflation and rising interest rates, The Danish Economic Council has said in a new report.

How is Denmark's economy handling inflation and rate rises?

The council, led by four university economics professors commonly referred to as “the wise men” or vismænd in Denmark, gave a much rosier picture of Denmark’s economy in its spring report, published on Tuesday, than it did in its autumn report last year. 

“We, like many others, are surprised by how employment continues to rise despite inflation and higher interest rates,” the chair or ‘chief wise man’,  Carl-Johan Dalgaard, said in a press release.

“A significant drop in energy prices and a very positive development in exports mean that things have gone better than feared, and as it looks now, the slowdown will therefore be more subdued than we estimated in the autumn.”

In the English summary of its report, the council noted that in the autumn, market expectations were that energy prices would remain at a high level, with “a real concern for energy supply shortages in the winter of 2022/23”.

That the slowdown has been more subdued, it continued was largely due to a significant drop in energy prices compared to the levels seen in late summer 2022, and compared to the market expectations for 2023.  

The council now expects Denmark’s GDP growth to slow to 1 percent in 2023 rather than for the economy to shrink by 0.2 percent, as it predicted in the autumn. 

In 2024, it expects the growth rate to remain the same as in 2003, with another year of 1 percent GDP growth. In its autumn report it expected weaker growth of 0.6 percent in 2024.

What is the outlook for employment? 

In the autumn, the expert group estimated that employment in Denmark would decrease by 100,000 people towards the end of the 2023, with employment in 2024  about 1 percent below the estimated structural level. 

Now, instead, it expects employment will fall by just 50,000 people by 2025.

What does the expert group’s outlook mean for interest rates and government spending? 

Denmark’s finance minister Nikolai Wammen came in for some gentle criticism, with the experts judging that “the 2023 Finance Act, which was adopted in May, should have been tighter”.  The current government’s fiscal policy, it concludes “has not contributed to countering domestic inflationary pressures”. 

The experts expect inflation to stay above 2 percent in 2023 and 2024 and not to fall below 2 percent until 2025. 

If the government decides to follow the council’s advice, the budget in 2024 will have to be at least as tight, if not tighter than that of 2023. 

“Fiscal policy in 2024 should not contribute to increasing demand pressure, rather the opposite,” they write. 

The council also questioned the evidence justifying abolishing the Great Prayer Day holiday, which Denmark’s government has claimed will permanently increase the labour supply by 8,500 full time workers. 

“The council assumes that the abolition of Great Prayer Day will have a short-term positive effect on the labour supply, while there is no evidence of a long-term effect.” 

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