A mismatch between the policies of the US Federal Reserve and the European Central Bank could trigger a new European debt crisis in which greek bonds will dramatically lose their liquidity, warns Saxo Bank.
“While the outlook for the US economy can withstand higher government bond yields, the same cannot be said for Europe.” it says in the company’s statement. The discrepancy between the economies of the two countries is due to the fact that in the United States the monetary policy supporting the economy is accompanied by corresponding fiscal measures, while in Europe they are lagging behind. “Thus, higher yields in the euro area could lead to a faster tightening of financial conditions than in the US, undermining a possible recovery,” explains Saxo Bank.
The problem facing the ECB is that as the yields on US bonds continue to rise, they will be a better alternative for investors than European government bonds.
As Saxo Bank explains, the example of Greek bonds is typical, as the securities that are considered the most risky in the eurozone offer the same yields as the corresponding US government bonds when hedging is taken into account.
“As US yields continue to rise, we believe that selling bonds as an investment across the Atlantic will become more attractive to investors on a risk-to-reward basis,” explains Saxo Bank.
Analysts warn that such a shift in the markets would initially threaten Greece and Portugal, but could trigger a wider sell-off of all bonds in the region, which in turn would lead to a rapid rise in yields on all government bonds.
This crisis will not be comparable in intensity to the 2011 crisis, but it will bring a decline in yields, which will affect the ratings and financial position of Greece. “This means that we are likely to see a rapid decline in yields from zero to 100 basis points, which will sharply tighten financial conditions in the weakest European countries,” said Saxo Bank.
In these conditions, the ECB’s pandemic securities program (PEPP) will be inadequate, analysts say. This means that the central bank will have to change the terms of the program in order to buy more bonds from the most vulnerable countries. At the same time, the European Union will have to take further steps towards a financial union, Saxo Bank concludes.