By the standards of the euro zone, Germany is still a safe haven. But as the area as a whole keeps looking less safe, investors are starting to notice that, for all its strengths, Germany does lie within it.
On Wednesday, a German government bond offering was badly undersubscribed – bids were accepted for only 61 percent of the 6 billion euro issue. The norm is more like 90 percent. The bonds that were sold yielded a still comfortably low 1.98 percent. But that was 10 basis points more than the day’s low, and yields climbed another nine basis points later. By afternoon, the German paper yielded 24 basis points more than comparable U.S. debt. Just a week ago the gap was similar but in the opposite direction.
This is far from a sign of total panic. Even so, the trend is hard to deny and easy to explain. Investors are taking money out of the euro zone. The European Central Bank reported that non-euro area investors were net sellers of 52 billion euros of member government bonds in the third quarter, having bought 130 billion euros’ worth in the second. German Bunds may be the safest European holdings, but as fear mounts they too begin to look unnecessarily risky.
The objective of shunning everything euro-related is to stay out of the way of a possible euro collapse. Never mind that the exodus makes that collapse more likely: when investors want out, they run first and ask complicated questions later, if ever. And Germany would suffer from a splintering of the euro. While the country would eventually be an economic success with its own currency, a disorderly euro breakup would trash both the financial system and the export business of the zone’s leading creditor nation and exporter.
European authorities have already missed many opportunities to calm investors down with relatively mild measures. One remaining possible move – resisted so far by Berlin – is for the euro zone to collectively guarantee bonds issued by member nations. Even that would, in theory, dilute Germany’s strong credit a bit. But a disintegration of the euro zone would be far worse. The weak Bund auction is a signal for the region’s politicians and central bankers to stop squabbling.