Germany has “frightened the pants off investors”, says FxPro.com. Last week it suffered its worst bond auction since the euro’s inception, drawing bids worth just €3.9bn for €6bn of ten-year bonds with an average yield of 1.98%.
But the worry isn’t Germany’s finances, as Richard Barley points out in The Wall Street Journal. It could balance its budget next year, four years ahead of schedule. This failed auction suggests that “the crisis may have reached a tipping point in which confidence in the eurozone project as a whole… is running out”.
The trouble stems from an increasingly urgent choice for Germany, says Capital Economics. Will Germany bail out the rest of Europe by allowing the European Central Bank to print money on a massive scale to buy peripheral debt, or by pooling eurozone credit risk through the issuance of eurobonds? Or will it allow market forces to take their course, which implies a messy break-up of the single currency in the near future? Germany is “caught between a rock and a hard place”, with the outlook for its bonds threatened by inflation worries, other states’ finances, or potential chaos.
The loss of confidence in the eurozone has benefited American and British government bonds, with the ten-year yield on the latter edging below Germany’s this month, as prices have risen. As money leaves the eurozone, it becomes even less likely that the periphery will be able to raise the money it needs from the markets – triggering a default.