Massive haircuts for creditors = a lady after my own heart.... even though it would crush the money supply.
Stuart Staniford is a good guy. I used to exchange emails with him all the time, but he got mad at me over something I wrote once. Who doesn't? lol
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FRANKFURT (MarketWatch) — An auction of German government bonds technically failed Wednesday, underlining fears that Europe’s long-running sovereign debt crisis now threatens the core of the euro zone.
The sale of 6 billion euros ($8.1 billion) of 10-year government bonds, known as bunds, attracted bids totaling just €3.889 billion. The Bundesbank, which conducts auctions on behalf of the Germany’s federal debt agency, accepted €3.644 billion in bids.
That left the central bank to pick up the slack, retaining €2.356 billion of the supply, or 39% of the total amount on offer.
Granted, it hasn’t been uncommon for German debt auctions to fall short as safe-haven demand has driven German yields to record lows in recent months. Six of the last eight bund auctions have required the Bundesbank to pick up some slack, noted strategists at RBC Capital Markets.
However, total bids in Thursday’s sale exceeded the amount sold to bidders just 1.07 times, the lowest ratio since 1999, according to RBC. Also, the amount retained by the Bundesbank was much higher than the euro-era average of 20%, analysts said.
“It was awful,” said Nick Stamenkovic, fixed-income economist at RIA Capital in Edinburgh. “It just shows that investors are not only shying away from [peripheral] euro-zone bonds,” but are turning away from the euro zone in general.
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The results were enough to spook investors, sending the euro skidding to a six-week low below $1.3400. The euro /quotes/zigman/4867933/sampled EURUSD -0.84% traded at $1.3381 in recent action, down 0.9% from Tuesday.
Elsa Lignos, currency strategist at RBC, said that while the results offer little budget risk to Germany, “it is a further sign of a lack of demand” for European paper.
The results come as Germany continues to resist calls for jointly issued euro government bonds — an option that would presumably raise the country’s borrowing costs if effectively it participated in joint guarantees of debt issued by other euro-zone countries.
Simon Smith, chief economist at ForexPro, warned that it would be premature to see Wednesday’s auction results — and the ensuing “abject panic” in the currency market — as a sign investors are worried about Germany’s ability to pay back its debt.
“And it’s too early to tell whether investors are genuinely concerned that Germany could become the banker for the rest of Europe,” he said, in emailed comments. “But with the proposal for common bonds now on the table ... it is a concern that could well gain increased traction in the coming weeks.”
Meanwhile, safe-haven flows into bunds weren’t much in evidence as Germany’s 10-year bund yield /quotes/zigman/4869083 DE:10YR_GER +0.24% jumped 12 basis points in the secondary market to 2%. The development comes after Finland and the Netherlands — two triple-A rated euro-zone nations with strong public finances — saw their yields rise sharply last week.
Bond yields rise as prices fall.
Those moves were widely seen as evidence the two-year-old debt crisis had shifted from the periphery of the euro zone to the core amid ongoing de-leveraging by banks and outright shunning of European debt by investors.
France in spotlight too
Meanwhile, French and Belgian bond yields rose sharply on Wednesday after a Belgian newspaper reported that a previously-agreed bailout plan for troubled lender Dexia SA /quotes/zigman/285541 BE:DEXB +6.70% was proving unworkable.
The report by De Standaard said new negotiations between French and Belgian officials were under way. Fears France would be forced to dig deeper to fund the bailout heightened worries the triple-A rating of the euro zone’s second largest economy could be under threat, said Jane Foley, currency strategist at Rabobank International.
Underlining those worries, Fitch Ratings said on Wednesday that France’s triple-A rating would be at risk if a further intensification of the euro-zone crisis resulted in a much sharper economic downturn in France and a material increase in the risk of contingent liabilities.
On the positive side, however, Fitch noted that the French rating is underpinned by its high-value-added and diverse economy, stable tax base and commitment to deficit reduction.
France’s 10-year yield /quotes/zigman/4869091 FR:10YR_FRA +0.15% rose 11 basis points to 3.63%, while Belgium’s 10-year yield /quotes/zigman/4869110 BE:10YR_BEL +0.14% jumped 18 basis points to 5.22%.
And pressure remained on Italy and Spain, with Italy’s 10-year yield /quotes/zigman/4869096 IT:10YR_ITA +0.13% moving back toward the 7% danger zone. It was last seen at 6.87%, up 20 basis points. The Spanish 10-year yield /quotes/zigman/4869131 ES:10YR_ESP +0.14% rose 7 basis points to 6.66%.