May 3, 2024

Weak Sale of Bonds Tests Germany’s Stature in Crisis

Analysts cautioned against reading too much into a single bond issue — one of nine this year that has failed to sell out, according to the German Finance Ministry. But the dismal sale results helped push down stocks worldwide and contributed to the atmosphere of fear that prevails in Europe: that the crisis is getting ahead of the political will to solve it.

In the first steps toward the closer political and financial integration that many have come to believe is essential for the survival of the euro, the European Commission proposed Wednesday that countries surrender more power over their national finances to the European authorities, giving Brussels the right to request a rewrite of spending plans that seem too profligate.

The commission, the executive agency of the European Union, also floated ideas for the issuance of bonds backed by all the countries of the euro zone — a measure that, despite German opposition, is gaining acceptance as a means of market reassurance as the crisis persists.

“Without stronger governance in the euro area it will be difficult, if not impossible, to sustain the common currency,” José Manuel Barroso, president of the commission, said in Brussels.

With the debt crisis gaining momentum rather than abating, and threats growing to countries at the core of the currency zone, measures that were politically impossible just a year ago are now being actively discussed, though it remains to be seen whether they will be enough to reassure markets that the crisis has been contained.

“The commission is slowly but surely becoming a European Finance Ministry, one step at a time,” said Sony Kapoor, managing director of Re-Define, an economic research group.

The proposals, which must be approved by E.U. governments, align Brussels with Germany on the issue of budgetary oversight, though they stop short of the veto power that Berlin has urged over profligate spending plans.

They go further toward supporting a common euro zone bond than Germany has so far been willing to go. Chancellor Angela Merkel of Germany, during a budget debate Wednesday in Berlin, reiterated her opposition to the creation of the bonds, but she has not completely ruled out the possibility of issuing bonds based on collective euro zone obligations at some future date.

If Germany’s borrowing costs continue to rise, it would be a blow to the country’s prestige and could profoundly shift the debate about how to cope with the euro crisis. About one-third of a €6 billion, or $8 billion, issue of German bonds found no buyers, twice as much unsold stock as normal, the country’s central bank reported.

In addition, the market yield on German 10-year bonds climbed close to the comparable British security, an unusual development considering that Britain has higher inflation than Germany and is more indebted. Germany has been able to boast that its solid economy and low debt are proof that austerity is the answer to the sovereign debt crisis. But if investor faith in the country slips, Germany’s moral authority could weaken.

“Losing that bargaining power could be massive for Germany,” said Silvio Peruzzo, euro area economist at Royal Bank of Scotland. “That is one of the pillars on which Germany has based its policy approach.”

Another few bad auctions, he said, “could shift the debate to, The austerity is too strong, we need growth.”

The German bond auction was one of several factors weighing down world markets Wednesday. Stocks fell in Asia and Europe after reports that manufacturing activity in China and the euro zone had weakened in the third quarter.

The continuing political crisis in Belgium sent the risk premium on Belgian sovereign bonds over German bonds to its highest level since the creation of the euro. The cost of insuring against default in 15 European governments rose to an all-time high Wednesday, according to data compiled by Markit.

Also Wednesday, a second credit rating agency, Fitch, warned that France could lose its prized triple-A rating because its commitment to the euro zone bailout fund was straining its finances. Moody’s Investors Service has issued a similar warning recently.

Article source: http://www.nytimes.com/2011/11/24/business/global/Euro-Fears-in-Markets-Spread-to-Germany.html?partner=rss&emc=rss

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