Hmmm. It looks like I got my eurozone gloom in reverse order today. It wasn't exactly front-page news in most newspapers — hey, who cares if Europe is imploding? — but today brought yet more bad news on the bond auction front. Except this time the bad news wasn't from Greece, or Spain, or Italy, or even from Finland or the Netherlands. It was from the one place where the news was never supposed to get bad, Europe's Rock of Gibraltar. Ryan Avent explains:
Markets were still digesting news of Spain's terrible bond auction yesterday, in which the yield on its 3-month debt more than doubled, from 2.3% to over 5%. That was but an appetizer, however; in an auction of 10-year debt today, Germany failed to place some 40% of the issuance. The lack of appetite for German debt has come as a shock to many, and the language being used to describe matters is increasingly apocalyptic. "It is a complete and utter disaster", Reuters has one strategist saying.
When investors turn up their noses at German bonds, they aren't really saying they think Germany is doomed. They're saying they think the euro itself is doomed and they're getting out until someone steps up to fix things. From the Wall Street Journal: "The auction reflects the deep mistrust [of the] euro project rather than a mistrust [of] German government bonds," said Danske's chief analyst Jens Peter Sorensen. "As some investors say regarding the euro project—if it is broke, then fix it." In a similar vein, Kathleen Brooks of Forex offered an optimistic take on the German auction failure (investors just want higher yields), a pessimistic take (Europe is doomed), and this take:
The bond market is staging a buyers strike, essentially trying to push Germany to take action.... If this crisis isn't dealt with in the near-term then bond investors will ditch all of the Eurozone, even Germany. Thus, the effect of German belligerence in dealing with this crisis is today's failed auction.
Maybe so. Maybe investors are just telling the core eurozone countries to get off their asses and fix things. The problem is that (a) Germany and France and the ECB have so far not shown any kind of willingness to damn the torpedoes and do whatever it takes to rescue the eurozone, and (b) things have now gotten to a point where it's not clear if they could rescue the eurozone even if they did pull out all the stops. Megan McArdle:
Effectively, Germany and France and a handful of other tiny countries have to guarantee both the sovereign debt and the bank liabilities of the whole eurozone. Given the holes that recent events have exposed in these systems, can they credibly do that? Even if the Greeks and Italians don't use that guarantee as a blank check to avoid reform?
....You can view the failed auction as a referendum on the instability of the euro, and hence the German banking system, in which case maybe "fixing" the euro with German guarantees fixes the problem. But you can also view it as a referendum on membership in the euro, full stop. The market may be saying that as long as Germany is tied to these other, troubled, countries, their debt looks more dangerous. In which case, deeper integration doesn't really help.
This might just be a bump on the road. That's certainly the official response from German officials and the ECB (the auction failed "for technical reasons," explained ECB Vice President Vítor Manuel Ribeiro Constâncio). Alternatively, it might be the beginning of the end, as the great delevering really kicks in and Hyun Song Shin's vicious circle of a banking crisis feeding into a sovereign debt crisis takes off in earnest. In any case, I assume your seat belts are already fastened, so I won't tell you to fasten them. But at least keep them fastened, OK?