FacebookTwitterGoogle+RedditEmail

Germany’s “Failed” Bond Auction

“We are caught, it seems, in one of those self-reinforcing loops that almost always presage a collapse.”

— Michael Pettis, China Financial Markets

Germany’s “failed” bund auction on Wednesday was a real gamechanger. It means that Europe’s biggest and most powerful economy will not escape the contagion that’s swept across the south. Germany’s borrowing costs will rise and it’s finances will be put under a microscope. But that’s just the half of it. What’s roiling the markets is that investors are now pricing in the probability of a eurozone breakup. That’s what all the commotion is about; the nightmare scenario is beginning to unfold.

Here are the facts: Of the €6 billion in 10-year bonds that were offered at Wednesday’s auction, only €3.6 billion were purchased leaving the Bundesbank with the remaining €2.4 billion, which is 39 percent of the total allotment, the highest ratio on record.

The auction was, in the words of one trader “a complete disaster” mainly because it showed that Germany is not the safe haven that many thought it was. German debt has become a “risk asset” overnight just like that of Greece or Italy. (although to lesser degree) Investors are fleeing Europe altogether and moving their money into Gilts and US Treasuries. Take a look at this from the Wall Street Journal:

“Euro-zone leaders say they are determined to save the single currency. But the smart money is voting with its feet. First, short-term U.S. dollar-funding markets effectively closed, then the senior unsecured-bond markets shut down, then the interbank market. Now, corporate customers appear to be withdrawing their deposits from some countries’ banks. With an estimated €1.7 trillion ($2.29 trillion) of funding to roll over in the next three years, the stresses in the euro-zone banking system look doomed to get worse….

If eurozone leaders are serious about saving the euro, they must find ways to persuade the smart money to stay.” (“Europe’s Smart Money Votes With Its Feet”, Wall Street Journal)

So, the eurozone is experiencing a bankrun, only, so far, much of the money has merely shifted from the weaker countries to the stronger. Now that’s beginning to change. But don’t be deceived, the problem isn’t Germany’s debt-to-GDP ratio or its prospects for future growth. The problem is that it’s linked to other teetering sovereigns in a single currency suicide pact, and there’s no way to get out unscathed. Here’s an excerpt from the Guardian:

“Global investors headed for the eurozone exit on Thursday after leaders of the area’s three biggest economies squashed residual market hopes for a huge intervention by the European Central Bank (ECB) to solve the sovereign debt crisis….

Angela Merkel again ruled out any expanded role for the ECB and stamped down proposals for single, eurozone-wide “eurobonds” to share the risk of sovereign debt. The ECB, she said, was only responsible for monetary policy….

Merkel … agreed only that early agreement to boost the EU’s bailout fund, the European financial stability facility, could help resolve the immediate crisis…She reiterated the view she expressed to the Bundestag a day earlier that eurobonds or the collectivisation of sovereign risk were neither “necessary nor appropriate” and could function only at a later stage of fiscal union.” (“Fear sweeps markets as Germany rules out ECB intervention”, Guardian)

Merkel’s rejection of eurobonds and fiscal transfers is a death warrant for the eurozone. She also refuses to allow the ECB to act as lender of last resort which would stem the flight out of government bonds. Here’s what a senior trader at a US bank told the Financial Times:

“We are now seeing funds and clients wanting to get out of anything that is denominated in euros and that includes Bunds because they don’t know what will happen to monetary union.”

See? Germany may be an industrial powerhouse and have it’s house in order (economically), but that’s not going to matter if the capital flight continues. It will face the same excruciating reckoning as the others.

So, what’s the solution?

In truth, there are only two options; either move towards total political and fiscal integration (A United States of Europe) or scrap the euro-project altogether and dissolve the union. If policymakers continue to procrastinate (“the politics of dither”), then the market will impose its own solution which will involve a cascade of bank and corporate defaults, soaring unemployment, agonising deflation and a decade of severe depression.

So, is there any chance of a positive outcome to the EU debt crisis? Here’s how economist James Galbraith answered that question:

James Galbraith: “No, I don’t think so. To get there you would have to have a complete reversal of the ideas that presently govern Europe. You would have to have a much greater sense of solidarity, a greater willingness to put European funds into the periphery in a serious and sustained way, and you’d have to have a plan for their growth and development. None of those are presently in the offing.” (Daily Ticker)

EU leaders haven’t changed their minds about anything. In fact, they’ve rejected every idea that might have helped, which is why the eurozone will not pull out of its death spiral.

For the video of Galbraith see link:

http://finance.yahoo.com/blogs/daily-ticker/europe-crisis-may-end-violent-blow-galbraith-161311592.html

 

MIKE WHITNEY lives in Washington state. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion, forthcoming from AK Press. He can be reached at fergiewhitney@msn.com

More articles by:

MIKE WHITNEY lives in Washington state. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion (AK Press). Hopeless is also available in a Kindle edition. He can be reached at fergiewhitney@msn.com.

April 25, 2018
Stanley L. Cohen
Selective Outrage
Dan Kovalik
The Empire Turns Its Sights on Nicaragua – Again!
Joseph Essertier
The Abductees of Japan and Korea
Ramzy Baroud
The Ghost of Herut: Einstein on Israel, 70 Years Ago
W. T. Whitney
Imprisoned FARC Leader Faces Extradition: Still No Peace in Colombia
Manuel E. Yepe
Washington’s Attack on Syria Was a Mockery of the World
John White
My Silent Pain for Toronto and the World
Mel Gurtov
Will Abe Shinzo “Make Japan Great Again”?
Dean Baker
Bad Projections: the Federal Reserve, the IMF and Unemployment
David Schultz
Why Donald Trump Should Not be Allowed to Pardon Michael Cohen, His Friends, or Family Members
Mel Gurtov
Will Abe Shinzo “Make Japan Great Again”?
Binoy Kampmark
Enoch Powell: Blood Speeches and Anniversaries
Frank Scott
Weapons and Walls
April 24, 2018
Carl Boggs
Russia and the War Party
William A. Cohn
Carnage Unleashed: the Pentagon and the AUMF
Nathan Kalman-Lamb
The Racist Culture of Canadian Hockey
María Julia Bertomeu
On Angers, Disgusts and Nauseas
Nick Pemberton
How To Buy A Seat In Congress 101
Ron Jacobs
Resisting the Military-Now More Than Ever
Paul Bentley
A Velvet Revolution Turns Bloody? Ten Dead in Toronto
Sonali Kolhatkar
The Left, Syria and Fake News
Manuel E. Yepe
The Confirmation of Democracy in Cuba
Peter Montgomery
Christian Nationalism: Good for Politicians, Bad for America and the World
Ted Rall
Bad Drones
Jill Richardson
The Latest Attack on Food Stamps
Andrew Stewart
What Kind of Unionism is This?
Ellen Brown
Fox in the Hen House: Why Interest Rates Are Rising
April 23, 2018
Patrick Cockburn
In Middle East Wars It Pays to be Skeptical
Thomas Knapp
Just When You Thought “Russiagate” Couldn’t Get Any Sillier …
Gregory Barrett
The Moral Mask
Robert Hunziker
Chemical Madness!
David Swanson
Senator Tim Kaine’s Brief Run-In With the Law
Dave Lindorff
Starbucks Has a Racism Problem
Uri Avnery
The Great Day
Nyla Ali Khan
Girls Reduced to Being Repositories of Communal and Religious Identities in Kashmir
Ted Rall
Stop Letting Trump Distract You From Your Wants and Needs
Steve Klinger
The Cautionary Tale of Donald J. Trump
Kevin Zeese - Margaret Flowers
Conflict Over the Future of the Planet
Cesar Chelala
Gideon Levy: A Voice of Sanity from Israel
Weekend Edition
April 20, 2018
Friday - Sunday
Paul Street
Ruling Class Operatives Say the Darndest Things: On Devils Known and Not
Conn Hallinan
The Great Game Comes to Syria
Jeffrey St. Clair
Roaming Charges: Mother of War
Andrew Levine
“How Come?” Questions
Doug Noble
A Tale of Two Atrocities: Douma and Gaza
Kenneth Surin
The Blight of Ukania
FacebookTwitterGoogle+RedditEmail