FacebookTwitterGoogle+RedditEmail

Germany’s “Failed” Bond Auction

by MIKE WHITNEY

“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.

Weekend Edition
November 17, 2017
Friday - Sunday
Paul Street
Thank an Anti-War Veteran
Andrew Levine
What’s Wrong With Bible Thumpers Nowadays?
Jeffrey St. Clair - Alexander Cockburn
The CIA’s House of Horrors: the Abominable Dr. Gottlieb
Wendy Wolfson – Ken Levy
Why We Need to Take Animal Cruelty Much More Seriously
Mike Whitney
Brennan and Clapper: Elder Statesmen or Serial Fabricators?
David Rosen
Of Sex Abusers and Sex Offenders
Ryan LaMothe
A Christian Nation?
Dave Lindorff
Trump’s Finger on the Button: Why No President Should Have the Authority to Launch Nuclear Weapons
W. T. Whitney
A Bizarre US Pretext for Military Intrusion in South America
Deepak Tripathi
Sex, Lies and Incompetence: Britain’s Ruling Establishment in Crisis 
Howard Lisnoff
Who You’re Likely to Meet (and Not Meet) on a College Campus Today
Roy Morrison
Trump’s Excellent Asian Adventure
John W. Whitehead
Financial Tyranny
Ted Rall
How Society Makes Victimhood a No-Win Proposition
Jim Goodman
Stop Pretending the Estate Tax has Anything to do With Family Farmers
Thomas Klikauer
The Populism of Germany’s New Nazis
Murray Dobbin
Is Trudeau Ready for a Middle East war?
Jeiddy Martínez Armas
Firearm Democracy
Jill Richardson
Washington’s War on Poor Grad Students
Ralph Nader
The Rule of Power Over the Rule of Law
Justin O'Hagan
Capitalism Equals Peace?
Matthew Stevenson
Into Africa: From the Red Sea to Nairobi
Geoff Dutton
The Company We Sadly Keep
Evan Jones
The Censorship of Jacques Sapir, French Dissident
Linn Washington Jr.
Meek Moment Triggers Demands for Justice Reform
Gerry Brown
TPP, Indo Pacific, QUAD: What’s Next to Contain China’s Rise?
Robert Fisk
The Exile of Saad Hariri
Romana Rubeo - Ramzy Baroud
Anti-BDS Laws and Pro-Israeli Parliament: Zionist Hasbara is Winning in Italy
Robert J. Burrowes
Why are Police in the USA so Terrified?
Chuck Collins
Stop Talking About ‘Winners and Losers’ From Corporate Tax Cuts
Ron Jacobs
Private Property Does Not Equal Freedom
Kollibri terre Sonnenblume
Mass Shootings, Male Toxicity and their Roots in Agriculture
Binoy Kampmark
The Fordist Academic
Frank Scott
Weapons of Mass Distraction Get More Destructive
Missy Comley Beattie
Big Dick Diplomacy
Michael Doliner
Democracy, Real Life Acting and the Movies
Dan Bacher
Jerry Brown tells indigenous protesters in Bonn, ‘Let’s put you in the ground’
Winslow Myers
The Madness of Deterrence
Cesar Chelala
A Kiss is Not a Kiss: Sexual Abuse and Exploitation of Children
Jimmy Centeno
Garcia Meets Guayasamin: A De-Colonial Experience
Stephen Martin
When Boot Becomes Bot: Surplus Population and The Human Face.
Martin Billheimer
Homer’s Iliad, la primera nota roja
Louis Proyect
Once There Were Strong Men
Charles R. Larson
Review: Mike McCormack’s Solar Bones
David Yearsley
Academics Take Flight
FacebookTwitterGoogle+RedditEmail