The single currency dropped more than 1% on Tuesday, falling below the 1.03 level for the first time in two decades, as the incoming economic depression will likely be very hard.
Sanctions on Russia are defaulting domestic firms
Following Russia’s reduction of natural gas deliveries to Europe, the stock of German gas and power utility Uniper, which is also the country’s largest importer of Russian gas, plummeted after the company lowered its outlook and disclosed that it was in advanced talks with the government to secure liquidity, which may include a full-blown bailout from Germany, as per Bloomberg.
According to two people involved in the discussions, the government is considering implementing several measures, including loans, acquiring an ownership position, and transferring some of the price increase onto consumers.
As part of the plan, Reuters previously reported that Germany’s government is drafting legislation enabling it to acquire stakes in utilities and levy consumers with emergency fees. In addition, ministers are rushing to address the impact of skyrocketing energy prices on electricity firms after Russia’s invasion of Ukraine.
Economy Minister Robert Habeck recently warned of “a Lehman effect” as suppliers face skyrocketing costs to meet customer obligations. Customers will be able to bear more of the cost of rising gas prices according to the new law. This week, the measure is expected to receive cabinet approval.
As the energy crisis intensifies, the second-largest city in Germany is considering the possibility of limiting hot water.
“In an acute gas shortage, warm water could only be made available at certain times of the day in an emergency,” Hamburg’s environment senator Jens Kerstan told German newspaper Welt am Sonntag on Saturday.
You may also read: German gas credit line may not be enough
In other news, the German trade surplus has disappeared. May’s foreign trade balance was MINUS 1 billion EUR, the first negative reading since 1991 as a result of the country’s energy issues and manufacturing downturn.
If the German economy implodes, the single currency might decline another 10% quickly, dropping below parity against the USD. Additionally, the deep recession will surely hit other EU nations primarily dependent on Germany.
The probability of Europe slipping back into a recession appeared to be mounting, according to Derek Halpenny, head of global markets research at MUFG, following yet another significant 17% increase in natural gas prices in Europe and Britain.
“It will continue to be very difficult for EUR to rally in any meaningful way with the energy picture worsening and risks to economic growth increasing notably,” said MUFG’s Halpenny.
The next target for euro bears will be at 1.0. On the other hand, the pair must climb above 1.06 to stabilize.