Some peripheral eurozone nations might call it ‘poetic justice'. Traders would no doubt call it a welcome relief. And Germans might call it a move of Realpolitik.
Some peripheral eurozone nations might call it ‘poetic justice’. Traders would no doubt call it a welcome relief. And Germans might call it a move of Realpolitik.
Whatever they call it, the trigger that finally leads Berlin to let the European Central Bank expand its bond-buying program – ideally to crisis-killing proportions – could be the partly unsuccessful sale of German Bunds this week.
Chancellor Angela Merkel has staunchly opposed expanding the ECB’s role, because its buying bonds means printing money (also called quantitative easing), and this could fuel fears among German voters of 1920s-style hyperinflation.
But John Ventre, portfolio manager at Skandia Investment Group, says: “Pressure on German bonds may change this dynamic, and if so then we may be closer than many think to the policy response that would put an end to this crisis: ECB quantitative easing.”
Germany failed to sell about 35% of €6bn worth of Bunds yesterday, twice the normal shortfall.
This sparked fears the eurozone crisis was spreading beyond Greece, Italy, Portugal, Ireland and Spain. Germany had to absorb the unsold portion itself.
Then, overnight, Japanese holders dumped Bunds, replacing them with gilts and sending Bund yields over gilt yields for the first time in over two years.
Skandia’s Ventre said: “German bonds aren’t as safe as they look – German debt to GDP is 87% but it would be much higher than that and deep into the danger zone, if Germany had to bail out its banks, something which would be inevitable if the eurozone collapsed.
“A collapse would leave Germany with a serious debt problem, so trying to insulate yourself from eurozone macro risk by buying German bonds doesn’t make a lot of sense.”
Hence the partial ‘buyers’ strike’ yesterday.
Ventre said part of Germany’s problem is a problem all eurozone states have – there is no buyer of last resort for their bonds, “because there is no German national central bank just like there is no Italian central bank, no Spanish central bank and no French central bank.
“The European Central Bank needs to fulfil this role – printing the money necessary to manage the deflationary risks of too much national debt, and being there to keep nation states solvent.
“Giving the ECB this power would be the silver bullet to solve this crisis and so far it’s only the Germans that have blocked this development.”