by Scott Boyd
As evidenced by the poor showing for German bonds at yesterday’s Bundesbank bond offering, it is obvious for all to see that the debt contagion tide is now threatening Germany’s coastline.
Of the 6 billion euros ($8.1 billion) in German sovereign debt offered for sale, nearly half was withdrawn due to lack of interest. For bonds that did attract buyers, yields were pushed higher; 10-year bonds alone rose four basis points to 1.96 percent. Not surprisingly, the euro struggled falling to $1.3350 by mid-morning in New York. Should weak demand and rising yields persist in future debt auctions, German officials will be forced to reconsider Germany’s place within the Eurozone.
Chancellor Merkel has publically and consistently maintained Germany’s commitment to the preservation of the eurozone. Nevertheless, the Chancellor has not wavered on her demand that countries receiving emergency funding must also commit to bringing deficits in line with eurozone membership rules. As seen with Greece in particular, this means the imposition of very unpopular government spending cuts and the introduction of new taxes and other fees to generate revenue.
Needless to say, those countries finding themselves in this position have not been keen on adopting these “austerity” requirements. After all, in one form or another, three European government leaders have fallen in recent weeks due to the backlash of the population forced to accept these stringent measures.
Be that as it may, Merkel continues to advocate for this approach while sharply condemning the creation of a “communal” eurozone bond as recommended by some officials. The idea is that a bond backed by the entire eurozone could be offered instead of individual sovereign debt in order to raise funds for those countries forced to pay exaggerated rates to attract investors.
But with yesterday’s auction, this avenue may no longer be an option.
If German sovereign debt – the highest- rated of all the eurozone countries – is indeed falling out of favor as suggested by today’s auction, how can bonds backed by the entire region, including the problem economies, expect to do better? More to the point, what does this new reality mean for the future of the eurozone?
Make no mistake, Merkel has always understood that Germany’s economy was vulnerable to the malaise spreading through the periphery economies. This is precisely why the Chancellor has argued against participating in a eurozone bond. But with the disappointing results of yesterday’s auction serving as a warning, lawmakers may be forced to take a stronger stance to protect Germany’s interests even if this is detrimental to the eurozone’s future prospects.
The ultimate form of control that Germany could take would be to withdraw from the eurozone and return to its own currency. Legal issues and other concerns notwithstanding, a return to the Deutsche mark would enable Germany to manage its own currency and remove itself from the debt crisis engulfing the eurozone.
Some day we may look back at this auction as the one event that really marked the beginning of the end of the eurozone.