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Euro Outlook Shaky After ECB Warns of Sovereign Debt Crisis 2.0

Euro Outlook Shaky After ECB Warns of Sovereign Debt Crisis 2.0

Dimitri Zabelin, Analyst

Euro, EUR/USD, ECB Outlook, Sovereign Debt Crisis – Talking Points

  • Euro unnerved after ECB officials warns Eurozone may face another sovereign debt crisis
  • Officials calling for jointly-issued debt, but fiscally-conservative states feel apprehensive
  • EUR/USD broke below key 1.0989-1.0981 support range, could challenge floor at 1.0783

Asia-Pacific Recap

US equity futures pointed higher heading into Asia’s Thursday trading session after stock markets ended in red at Wall Street’s close. Foreign exchange markets were relatively quiet, though the growth-sensitive Australian and New Zealand Dollars were modestly gaining vs their G10 counterparts. Learn about what might have catalyzed the risk-on tilt in investor sentiment here.

Euro Outlook Shaky After ECB Issues Warning of Stress in Sovereign Bond Markets

On Tuesday, ECB policymaker Yannis Stournaras warned that without proper measures, the Eurozone could face another sovereign debt crisis. While borrowing costs for economically-distressed member states – particularly those in the Mediterranean – have risen, they are, in historical terms, still relatively low. However, this dynamic may change if the coronavirus dampens what is an already-shaky outlook for regional growth.

Mr. Stournaras warned that even after the immediate threat of a wider contagion is eliminated, “Debt-sustainability issues might surface again[and] hamper growth prospects”. He warned that banks’ balance sheets may be in jeopardy as expectations of an increase in “soured loans” is anticipated to occur. As it stands, CDS spreads on European sub-investment grade debt are still hovering at crisis-era highs.

He was one among a growing number of policymakers who advocate for the issuance of joint bonds that will help to lower the risk premium for more at-risk economies and give them cheaper access to credit markets. However, fiscally-conservative states like Germany have expressed trepidation in going through with the policy out of concern that they may then be liable if other members default.

However, Germany’s economic fate – regardless of jointly-issued bonds or not – is still tied to the prosperity of its neighbors because they are its biggest customers. If Italy, France and other member states are enduring a recession or sovereign debt crisis, the Germany economy will not be immune. Officials are stressing that by mutualizing risk, governments can allocate more of their spending away from servicing debt.

Instead, states could then implement growth-stimulating policies and decrease the prospect of a regional downturn. Germany would benefit since its economic colleagues could then have more spending power and can continue purchasing goods from the so-called “Steam Engine of Europe”. Consequently, the Euro may rise if governments are able to reach a consensus on fiscal stabilization and step away from the precipice of a crisis.

EUR/USD Analysis

EUR/USD has broken below a key support range between 1.0989 and 1.0981, opening the door to a possible retest of the floor at 1.0783. However, traders may wait to commit capital until a clearer directional bias is given. If EUR/USD closes below the zone with follow-through, this may inspire further liquidation. Follow me on Twitter @ZabelinDimitri for more in-depth fundamental and technical analysis of the Euro.

EUR/USD – Daily Chart

Chart showing EUR/USD

EUR/USD chart created using TradingView

EURO TRADING RESOURCES

--- Written by Dimitri Zabelin, Currency Analyst for DailyFX.com

To contact Dimitri, use the comments section below or @ZabelinDimitrion Twitter

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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