Monday

3rd Oct 2022

Germany no longer immune to crisis

  • German government debt sales have now been stung by the eurozone crisis as well (Photo: EUobserver)

Germany had significant trouble offloading its bonds on Thursday in a sign that the eurozone crisis has spread to the very heart of Europe.

The country, whose credit worthiness has until now been viewed as nigh-on pristine, could only sell two thirds of its ten-year bonds at auction, a development that has sent shockwaves through markets as investors wonder whether the fittest economy in Europe can remain immune to contagion from the eurozone periphery.

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German finance minister Wolfgang Schaeuble’s spokesman however was quick to reassure reporters that the failed auction would not have any effect on the government’s ability to finance its operations.

In recent weeks, borrowing costs have steadily ticked upward not only for those states on the southern edge of the single-currency area, but also for France, Belgium, Austria and the Netherlands.

On Wednesday, Belgian ten-year yields at one point hit 5.53 percent, the highest in ten years, while France also saw yields on its ten-year bonds climb to 3.69 percent

The development follows on from a poor showing by Spanish bonds last week, where ten-year bonds at auction saw yields hit 6.975 percent - nearing the seven percent point at which other peripheral states were forced to apply to the EU and the International Monetary Fund for financial assistance.

The climb in borrowing costs across the board is a sign that investors and banks are dropping their holdings of European debt, no longer confident in the ability of the euro to survive in its current form.

Japan’s biggest mutual fund has sold off its full portfolio of Italian government bonds, according to Bloomberg News, which also reports that France’s BNP Paribas and Germany’s Commerzbank are selling European sovereign debt at at a loss.

Atop these gloomy developments, France was stung on Wednesday by a fresh report from credit rating agency Fitch that said that the country now had little room left to absorb any further shocks from the crisis.

Were there to be any further decline in growth or a need for deeper support for what are now essentially insolvent banks, Paris could lose its triple-A credit rating.

Separately, French President Nicolas Sarkozy is to host an EU-core triumvirate of himself, German Chancellor Angela Merkel and the newly installed Italian technocrat leader, Mario Monti.

Until now, the Franco-German duopoly have been the driving force in the heart of the eurozone, setting policy shifts almost to the exclusion of consultation with other EU powers.

The three are expected to discuss Italy’s austerity and structural adjustment plans, but also the wider eurozone crisis.

Monti is likely to be tapped for his opinions on the issuance of common European debt, or eurobonds, outlined in a series of options by the European Commission on Wednesday. Germany remains steadfastly opposed to the concept, but head of his appointment as Italian chief, Monti had publicly backed the idea.

Brussels sees no serious opposition to eurobonds

The European Commission has launched a polemic on eurobonds - a proposal that eurozone countries should guarantee one another's debt, taking member states into uncharted territory in terms of solidarity and trust.

Italian bonds shatter 7% bail-out ceiling

The interest rate on Italian 10-year government bonds breached seven percent on Wednesday, shattering the psychological bail-out ‘ceiling’. Greece, Portugal and Ireland all had to seek multi-billion-euro bail-outs when their 10-year bonds exceeded this threshold.

Eurozone bank buys record €22bn in bonds to contain euro crisis

The European Central Bank last week spent a record €22bn buying eurozone government bonds in a bid to prevent the eurozone debt crisis spreading, a move that is likely to fuel debate on the creation of eurobonds. Details of the buying spree came on the eve of a meeting between the French and German leaders in Paris.

US agency issues eurozone ultimatum

US ratings agency Standard & Poor's has warned it might lower the grade of all six triple-A euro countries if the upcoming EU summit does not deliver.

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