The failed German bond auction on Wednesday might have brought to an end one turbulent chapter in the history of the Continent’s debt crisis, during which Berlin remained insulated from much of the fallout.
Since 2009, Germany and a handful of other countries, like the Netherlands, have benefited significantly from cheaper borrowing costs as investors diverted cash from riskier assets and the bonds of southern European countries to debt issued by the Continent’s fiscal hawks.
According to an estimate by Re-Define, an economic research institute in Brussels, Germany saved around 20 billion euros ($26.7 billion) in borrowing costs from 2009 to 2011, with an additional 20 billion euros in estimated savings locked in for the future. A separate analysis, by the De Volksrant newspaper in the Netherlands, put Dutch savings at around 7.5 billion euros for 2009-11.
The drop in German borrowing costs, which according to Re-Define have fallen by more than half since the crisis hit, is more than a statistical quirk because it has helped shape the way the crisis has been handled within a two-tier euro zone.
It helps explain why Germany has taken a tough line against “budget sinners” in the south like Greece, which have been virtually locked out of bond markets by high borrowing costs, and why Germany has been reluctant to create a “big bazooka” or huge bailout fund to stem the crisis. The bond markets delivered cheap money to Germany, and resulted in something Berlin badly wanted: economic overhauls in Southern Europe. “So in fact, in the German system, they think, ‘It’s not bad that those guys understand that they are really close to the abyss,’ ” said one European official, who did not want to be identified because of the sensitivity of the issue.
The idea that those countries are learning something from the crisis, the official said, is “deep in the mentality” of Germany.
Germany has steadily objected to the creation of the one thing many observers say could temper the crisis: euro bonds backed by all 17 members of the monetary union. Issuing those bonds could drive up Germany’s own borrowing costs as it takes on the risk of less stable countries. Germany’s reluctance to issue the euro bonds has diminished somewhat, though, as the crisis has intensified.
While ministers in Berlin or the Hague may worry at one level about the fate of the euro, they have so far not faced direct pressure over their country’s own borrowing.
“The crisis, to most Germans (and to a lesser extent Dutch and Finns) remains an abstract thing,” wrote Sony Kapoor, managing director at Re-Define. Re-Define’s study notes that the yield on 10-year German government bonds, known as bunds, stood at around 4.7 percent in mid-2008. It now hovers around 2 percent, close to a record low in the 200 years for which records exist. Yields on five-year bonds are 1 percent, with two-year bonds at 0.38 percent.
“The increased demand for German bonds has been driven by both the financial and the euro crisis, with investors fleeing equities, high-yield bonds and, especially in the past two years, also other euro area sovereign bonds for the relative safety of German government bonds,” Re-Define’s report said.
In a letter this month to the Dutch Parliament, the country’s finance minister, Jan Kees de Jager, described De Volksrant’s estimate of a 7.5 billion euros of savings in borrowing costs as “plausible,” adding that there was “no telling how economic variables — including interest rates — would have developed without the crisis.”
Mr. de Jager said the crisis had added other costs to the government, which had increased the national debt.
Meanwhile, the bond markets have, in some senses, proved an ally to Berlin, most recently by pushing out Silvio Berlusconi, the former Italian prime minister, who presided for years over an economy with a debt level equivalent to 120 percent of gross domestic product.
Though they may not be immune to the wider European downturn, Germany and the Netherlands know that the steep rise in borrowing costs for countries like Italy and Spain is requiring those countries to get their public finances under control and enact painful economic reforms.
“Everybody is feeling the heat, apart from a small number of triple-A-rated countries,” said the European official, speaking anonymously.
While Germany saved 6 billion to 7 billion euros, the sum is small compared with annual German government spending of more than 300 billion euros, said a German government official, who did not want to be identified. Invoking government policy as the reason for not being named, the official added that it was still in Berlin’s interest to resolve the crisis, particularly since Germany was providing the largest guarantee to the euro zone’s bailout fund.
“We may be insulated in terms of interest rates,” the official said, but added “our liabilities are very high.”
Article source: http://www.nytimes.com/2011/11/25/business/global/german-bond-windfall-may-be-ending-with-euro-crisis.html?partner=rss&emc=rss