Markets turn on German bonds

Merkel walkingIt wasn't what the Germans expected. Yesterday the Germans managed to flog just €3.6bn of 10-year bonds although €6bn were laid on the table for investors.

The lack of enthusiasm for triple A-rated debt from Europe's most powerful economy pushed Germany's borrowing costs higher, to 2.26% as of today. More expensive than the UK - still able to borrow at 2.18% for 10 years.

Not so rock solid

Compared to Spain and Italy - their debt costs are approaching 7% - German's costs are still pretty good. But the idea of even mighty Germany - Kingpin of Europe! - being punished higher with risk premiums by investors is extraordinary. Germany losing its hallmark safe-haven status. Unthinkable, until yesterday.

it's probably a cost worth paying. If there is a serious break-up in the eurozone, the costs would be phenomenal for Germany, as the circulation of cash slows and banks get knocked out. Then, the crushing recession.

Pay up

Either way, Germany pays (and pays again). If Greece goes, that would be manageable. But not if Italy or Spain were to go under. However the deterioration in Germany's 10-year borrowing costs won't affect its still rock solid AAA credit rating yet.

France is in a rather different position; her new budget plans are still being agreed on and more cuts look likely. But the markets could still punish France because these cuts won't be implemented until after the spring elections.

So the end-game continues. European politicians have limited options, while the financial markets, with plenty of funny money (no, not the euro), have rather more. Unless, of course, there is an abrupt and wide-ranging outbreak of leadership (German) that helps to halt the panic.
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