It may be the eurozone’s leading light. But the German government still owes lots of money. So like most other governments, it need to sell its IOUs (known as ‘bunds’) to help pay the bills.
This morning it tried to tap the markets for €6bn. The response was – to put it frankly – awful.
The auction was less than 0.65 times covered. In other words, at best, Germany only had potential buyers for less than two-thirds of the bunds it was selling.
Worse, only 61% of the overall bids were at an acceptable price. So the country could only rake in €3.64bn. The rest of the bunds were left with the Bundesbank, Germany’s central bank.
Of course, figures like these are small fry nowadays. And Germany has past form in bond auction shortfalls. Six out of the last eight bund auctions have required the Bundesbank to pick up some slack, notes RBC Capital Markets.
But that’s hardly reassuring. Germany is the core of the eurozone, after all. And it’s seen as a ‘safe haven’ for global capital, claims Finance Minister Wolfgang Schäuble, as “the entire world has great confidence in both the performance and soundness of [its] fiscal policies”.
But confidence is the absolutely crucial word here. In truth, Germany’s finances aren’t that great at all. The national debt as a percentage of GDP is already higher than 80%. That’s worse than Spain.
Yet Germany is key to any more bail-outs of peripheral states. So this is a pivotal moment. “I cannot recall a worse auction”, says Marc Ostwald at Monument Securities. “If Germany can only manage this sort of participation, what hope for the rest?”
In other words, the markets are starting to ask if German really is such a good long-term bet. And if it isn’t, what chance has the eurozone of surviving intact?
In fact, that process could already have begun. Since falling as low as 1.7% on 9 November, German 10-year yields have surged – above the yield on US 10-year Treasuries – to 2.1% today. But despite this rise, German yields are still “at completely the wrong level”, says Ostwald.
If market confidence in Germany were to crumble, there would be a prolonged surge in its borrowing costs. Just a 1% hike in long-term rates would add €20bn to the German government interest bills.
The impact on eurozone-wide yields could be horrendous.
For investors, this promises to serve up even more uncertainty than we’ve seen so far. So a watching brief on European stocks makes sense for now. But there could ultimately be some opportunities amid the rubble. Next week’s magazine will feature our Europe round table, where our experts tell us their best shares to buy across the Channel.
Category: Economics