Embarrassment for economic powerhouse Germany as Eurozone debt uncertainty sees bonds go unsold
Sinking deeper: The debt crisis is now affecting Angela Merkel and the German economy
A 'disastrous' German bond sale has triggered fears Europe's debt crisis is starting to threaten Berlin, with the leaders of the eurozone's biggest economies still at odds over a longer-term solution.
Investors were also unnerved by reports that Belgium is leaning on France to pay more into emergency support for failed lender Dexia under a 90billion euro (£77billion pounds) rescue deal that had appeared done and dusted.
A special report by Fitch Ratings suggested France had limited room left to absorb shocks to its finances like a new downturn in growth or support for banks without endangering its cherished AAA credit status.
After one of the least successful debt sales by Europe's powerhouse economy since the launch of the single currency, the euro fell to 1.336 to the dollar and European shares sank to seven-week lows.
'The debt crisis is burrowing ever deeper, like a worm, and is now reaching Germany,' said one more euro-sceptic backbencher in Angela Merkel's centre-right government, Frank Schaeffler of the Free Democrats - the junior coalition partners.
The German debt agency was forced to retain almost half of a sale of 6 billion euros due to a shortage of bids by investors. The result pushed the cost of borrowing over 10 years for the bloc's paymaster above those for the United States for the first time since October.
'It is a complete and utter disaster,' said Marc Ostwald, strategist at Monument Securities in London.
The new bond promised to pay out a 2.0 per cent interest rate - the lowest ever on an issue of German ten-year Bunds. The auction's average yield was 1.98 per cent, down from 2.09 per cent for the previous benchmark in October.
Ten-year Bund yields were last up 12 basis points to 2.039 per cent versus 1.946 per cent for U.S. T-notes.
Eye of the storm: Many have called on the European Central Bank in Frankfurt to act more decisively
Finance Minister Wolfgang Schaeuble's spokesman told a news conference that the auction did not mean the government has refinancing problems and few on financial markets disagreed.
But it was a sign that as the bloc's paymaster Germany may slowly be pressured if the crisis continues to deepen. One senior ratings agency official said it could give Berlin cause to re-examine its refusal to embrace a broader solution.
'It's quite telling that there has been upward pressure on yields in Germany - it might begin to change perceptions,' David Beers of Standard & Poor's told a conference in Dublin.
The borrowing costs of almost all euro zone states, even those previously seen as low-risk such as France, Austria and the Netherlands, spiked in the last fortnight as panicky investors dumped paper no longer seen as safe.
'Bunds are starting to lose their appeal because markets have to believe the euro bonds story and Germany is very close to starting, essentially, to guarantee the debt of other countries,' said Achilleas Georgolopoulos, strategist at Lloyds Bank in London.
The crux of an acceleration of the crisis in the past month is Italian bond yields' jump to levels around seven per cent widely seen as unbearable in the long term, despite intervention by the European Central Bank to buy limited quantities.
Determined not to be pushed around by financial markets, Merkel is resisting calls, notably from France, to allow the ECB to act more decisively.
- DAVID BEERS,
STANDARD & POORS
In a forceful speech to the Bundestag lower house of parliament, Merkel issued one of her starkest warnings yet against fiddling with the bank's strict inflation-fighting mandate.
She also hit back at proposals from the European Commission on joint euro zone bond issuance, calling them 'extraordinarily inappropriate.'
Shortly before she spoke, French Finance Minister Francois Baroin told a conference in Paris that it was the ECB's responsibility to sustain activity in the currency bloc.
'The best response to avoid contagion in countries like Spain and Italy is, from the French viewpoint, an intervention (or) the possibility of intervention or announcement of intervention by a lender of last resort, which would be the European Central Bank,' said Ms Baroin.
The chancellor has said the EU treaty bars the ECB from acting as a lender of last resort and printing money to buy government debt. She rejected joint 'euro bonds', dismissed a proposal to mutualise the euro zone's debt stock, and rebuffed attempts to allow the bloc's rescue fund to borrow from the ECB or the IMF.
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