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German bonds auction flop raises alarm

Stephen Beard Nov 23, 2011

Kai Ryssdal: Let’s try an experiment in participatory radio, shall we? We’ve been covering the European debt crisis so long, you surely know the basic plot outlines as well as I do. Germany is — c’mon, say it with me: the strongest economy in Europe. The very heart of the eurozone.

So when the German government went to the bond markets this morning and couldn’t sell all the debt it had on offer, why that was a nicht good thing. It isn’t so much the amount in question; it was the idea that investors are now gun shy about debt that just a couple of days ago was the best Europe had to offer.

From the European Desk in London, Marketplace’s Stephen Beard has the latest on the ever-widening continental debt crisis.

Stephen Beard: The German government was left holding more than $3 billion worth of bonds, or bunds as they call them.

Julian Pendock of Senhouse Capital says this is a bad sign.

Julian Pendock: German bunds no longer look like the fail-safe safe haven that they have been seen as to date.

He says Germany’s credit worthiness has been damaged by its eurozone partners. Italy and Spain are in deep trouble; even France could lose its AAA rating. Germany may have to carry alone the weight of bailing out its neighbors.

Albrecht Ritschl is with the London School of Economics.

Albrecht Ritschl: Now it turns out that the whole debt burden of southern Europe combined is quite a bit too big to be shouldered by the Germans.

It’s argued that there is one way to solve the debt crisis at a stroke: For the European Central Bank to print money and buy vast quantities of government bonds. The Germans have vehemently rejected that move as inflationary. Julian Pendock believes Berlin might now soften its stance.

Pendock: If their own bonds are starting to need support, then the German government might change their minds to say: ‘Well, actually we would now support the ECB starting to print money.’

But Anska Belke of the DIW think tank in Berlin believes the German government is now — very privately — mulling a radically different approach to the debt crisis.

Anska Belke: It’s time now to discuss Germany’s exit from the euro area. This would not be done by Merkel, of course, in a public way. But of course, they are working on a Plan B.

And Albrecht Ritschl says the German public might not complain if the country did leave the eurozone.

Ritschl: That would be hugely popular in Germany going it alone.

But the cost of the eurozone collapsing — for Germany, for Europe and for the global economy — would be huge. In spite of today’s serious setback, the German government seems certain to soldier on, carrying the euro.

In London, I’m Stephen Beard for Marketplace.

Ryssdal: One last word about German debt, to put today’s failed bond auction into context: The yield on the notes offered today? Two percent, plus or minus. Well below, say, Italian or Spanish debt.

Right in line, though, with what the U.S. 10-year bond goes for.

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