Germany’s safe-haven status within the crisis-ridden eurozone was sullied on Wednesday after a disastrous bond auction sent bond yields soaring in Europe’s largest economy.
The German government failed to find buyers for E2.4Bn in a E6Bn auction of 10-year Bunds — the highest amount left unsold since the depths of the credit crunch in 2008.
Responding to the news, Societe Generale said: “Some investors are no longer showing up or have started to buy considerably less, preferring other fixed income or alternative safe havens.” It warned: “Auctions like the one this morning could cause fear to escalate that, after France, markets are also starting to doubt the position of Germany as funding pressures continue to mount.”
German and French government finances will come under severe strain if a return to a deep eurozone recession depresses tax revenues, or if there is a sharp rise in the cost they have to bear to bail out other eurozone countries.
A closely watched survey underlined this risk on Wednesday by indicating that the 17-member bloc has already returned to recession.
The preliminary eurozone Purchasing Managers Index (PMI) — closely watched each month as a timely indicator of the state of the economy — suggested that eurozone output is continuing to fall. The PMI survey recorded a figure of only 47.2 for November output. Any figure below 50 indicates a decline in activity. When combined with the October and September reports, it suggests the eurozone economy has been shrinking for three straight months. The composite survey also showed a drop in new orders – indicating that activity will remain weak in December.
Signs that even Germany’s sovereign bond market is struggling could further damage business activity in the eurozone. Over the past few months, crisis in the bloc’s financial markets has spilled over into the real economy, and vice-versa, in a constantly repeating negative feedback loop.
Chris Williamson, chief economist at Markit, the financial information company which publishes the PMI, testified to this phenomenon, saying: “Companies are clearly shaken by the debt crisis and its growing impact on the real economy, both in Europe and further afield.” Based on the PMIs for October and November, Markit estimates that eurozone gross domestic product (GDP) is on course to contract by about 0.6 per cent quarter-on-quarter in the final three months of this year. Mr Williamson added: “Malaise has spread from the periphery to the core. Even Germany is stagnating.”
Moreover, analysts say it is largely such weak recent economic data for the eurozone that has pushed sovereign yields higher.
Until recent weeks, debt financing problems had arisen only in those eurozone countries, such as Italy and Spain, whose low economic growth, high debt and yawning deficits raised fears about their ability to repay. But recent weeks have seen a rise in yields in other member states previously not seen as problematical.
In some cases this reflects heightened fears that the likely eurozone recession caused by the debt imbroglio will hit national tax revenues — making it harder to pay debt. Belgium, whose 10-year yield closed the European trading day at 5.52 percent on Wednesday, up 66 basis points in only two days, falls into this category. It is beset by a debt-to-GDP ratio of close to 100 percent.
However, the yields even of countries without severe debt problems have also risen. For example, Dutch bond prices fell last week on the news that its GDP had already declined in the third quarter.
Germany’s downbeat auction suggests that fears about a eurozone debt crisis have now spread to the entire continent. In the secondary market, the yield on the benchmark 10-year Bund soared by 13 basis points to 2.06 percent on Wednesday. France’s yields, which have been steadily rising, climbed by another 16 basis points to 3.67 percent.
The rise in yields even of countries with presently stable finances, such as Germany, also reflects the fact that the sovereign debt crisis has recently cast doubt on the very survival of the eurozone. The chaos created by a eurozone breakup could trigger major dislocations in financial markets, including a reluctance to lend to counterparties in different countries suffering from extreme currency volatility — echoing the closing up of financial markets after the 2008 Lehman collapse. This would create severe economic crisis throughout the bloc — including even Germany.
