holiday weekend commentary - EuroZone Problems starting to affect Germany and USA
from
(snip)"A "disastrous" German bond sale on Wednesday sparked fears that Europe's debt crisis was starting to threaten even Berlin, with the leaders of the euro zone's two biggest economies still at odds over a longer-term structural solution.
With contagion spreading, a majority of twenty prominent economists polled by Reuters predicted that the euro zone was unlikely to survive the crisis in its current form, with some envisaging a "core" group that would exclude Greece.
Investors were also unnerved by reports that Belgium is leaning on France to pay more into emergency support for failed lender Dexia under a 90-billion-euro ($120-billion) rescue deal that had appeared done and dusted.
A special report by Fitch Ratings suggested France had limited room left to absorb shocks to its finances, such as a new downturn in growth or support for banks, without endangering its triple-A credit status.
"The debt crisis is burrowing ever deeper, like a worm, and is now reaching Germany," one of the more eurosceptic backbenchers in Angela Merkel's center-right government, Frank Schaeffler of the junior coalition partner Free Democrats (FDP), told Reuters.
The German debt agency could not find buyers for almost half a bond sale of 6 billion euros. That pushed the cost of borrowing over 10 years for the bloc's paymaster above those for the United States for the first time since October.
"It is a complete and utter disaster," said Marc Ostwald, strategist at Monument Securities in London.
The new bond promised to pay out a 2.0 percent interest rate - the lowest ever on an issue of German 10-year Bunds. The auction's average yield was 1.98 percent, down from 2.09 percent for the previous benchmark in October.
After one of the least successful debt sales by Europe's powerhouse economy since the launch of the single currency, the euro fell to 1.336 against the dollar and European shares sank to 7-week lows.
Bunds slumped after the auction. Ten-year yields rose 14.5 basis points to 2.056 percent, yielding more than U.S. Treasury notes for the first time since early last month.
GERMAN EXPOSURE
Finance Minister Wolfgang Schaeuble's spokesman told a news conference that the auction did not mean the government had refinancing problems and few on financial markets disagreed.
But it was a sign that, as the bloc's paymaster, Germany may slowly be pressured if the crisis continues to deepen. One senior ratings agency official said it could give Berlin cause to re-examine its refusal to embrace a broader solution.
"It's quite telling that there has been upward pressure on yields in Germany - it might begin to change perceptions," David Beers of Standard & Poor's told a conference in Dublin.
The borrowing costs of almost all euro zone states, even those previously seen as safe such as France, Austria and the Netherlands, spiked in the last two weeks as panicky investors dumped paper no longer seen as risk-free.
"Bunds are starting to lose their appeal because markets have to believe the euro bonds story and Germany is very close to starting, essentially, to guarantee the debt of other countries," said Achilleas Georgolopoulos, strategist at Lloyds Bank in London."(snip)
Take-aways from this 'disastrous' German gov't bond auction, and the quickly ensuing effects on world stock and commodities markets, seem to be as follows ...
- the 'smart money' has finally decided that even the 'best' economy countries in the EuroZone are no longer worthy of 'safe haven' status when it comes to moving their money out of more 'troubled' EuroZone countries ( i.e. Greece, Italy, Portugal, Spain etc. ) - because the future fate of the Euro currency itself is at risk.
- some of that 'smart money' shifted across the Atlantic seeking the comparative 'safe haven' of US treasury bonds ... which pushed up the US dollar exchange rate, pushed up US treasury bond prices, and tanked US stock markets via the underlying 'risk off' trade.
- some of that 'smart money' ran to particular commodities markets in search of safety ... notably oil and gold.
In the way of speculation, the new 'trend' just established ... i.e. a strengthening US dollar as the 'least evil' major currency, combined with falling US dollar denominated interest rates ( resulting from increased demand for US treasury bonds ), and especially combined with rising US dollar denominated oil and gold prices ( which would normally have fallen as the result of a strengthening US dollar ) ... does NOT bode well for the future.
Re: holiday weekend commentary - EuroZone Problems starting to affect Germany and USA
Some people had been pointing to Germany as a country that was recovering well and without deficit stimulus. Reality sets in.