German Bund Auction A "Complete And Utter Disaster"

This is huge, obviously.

Contagion Shakes The Euro Core As 10 Year German Bund Auction A "Complete And Utter Disaster"

Earlier today Germany tried to sell €6 billion of 10 Year bunds. It "sold" €3.644 at a 1.98% yield. Which meant the German debt agency had to retain, i.e., not sell, the 39% balance, or €2.356 billion. Said otherwise the offering was a complete disaster and as Reuters points out, one of Germany's worst bond sales since the launch of the euro, and that much higher Bund yields are coming very soon to a neighborhood near you. The sale "prompted concerns the debt crisis was even beginning to threaten Berlin on Wednesday, with the Bundesbank forced to buy large amounts of the bonds to ensure the auction did not fail.

Damn... this is big...

Something like that happens every time in the US because of how the system is setup... people only buy 30-40% (at most) of every US bond auction, the rest is bought by US ``primary dealers`` who have an unlimited FED credit line... but for Germany, it's bad, real bad.

As for next steps: first the UK, then Japan, and finally the US...

+1000000

could you explain further, why this is so bad ?

reply to post by Vitchilo

Damn this looks bad.
I can already hear the eurocentralists scream for more EU and a rush to the ESM when the opposite is the only solution... the sooner the better.
Time to quit this Non€s€ns€ already!

Start the presses... I want my DM back!

Originally posted by icepack
could you explain further, why this is so bad ?

It basically means that even Germany, by far the strongest economic member of the European union is no longer able to control the interest rate on its debt. It is extremely rare a government bond auction does not sell out at its offering, because it is only a select few banks that get the right to buy the bonds directly, and it is normally a license to print money.

So the premier financial institutions in Europe now expect sovereign defaults of debt, and expect Germany to be on the hook for the losses. If this happens in Germany it is going to happen everywhere in Europe, and then quite possibly everywhere else that has heavy exposure to Europe.

Higher interest rates will force governments to do one of two things inflate the money supply - which actually probably cause the interest rates to go higher and start a death spiral, or cut spending to their income level (the only real solution in the long run) which will likely lead to civil unrest as people no longer get the government handouts they think they are entitled to.

To sum up, it means governments are losing control to the market, and even the insiders no longer are willing to go along with the story that everything is going to be ok in Europe.

Watch Out !!

Interest rates will be rising ....

All at YOUR expense

reply to post by proximo

thanks for the explanation. if they dont sell the bonds, the demand is low, so shouldnt the interest rates fall ?

Originally posted by xuenchen
Watch Out !!

Interest rates will be rising ....

All at YOUR expense

whats so funny ? are you watching this from a spacecraft in orbit ?

Originally posted by icepack
reply to post by proximo

 

thanks for the explanation. if they dont sell the bonds, the demand is low, so shouldnt the interest rates fall ?

No, you have it backwards. The reason their is no demand is because the interest rates the government is paying on the bonds is to low. The buyers are saying I don't want to buy a bond that will only pay me 2% a year for ten years.

Who could blame them, it's insane anyone is buying at these low of rates as it is, if it was a completely free market I guarantee you nobody would be. It really is a stupid bet - basically you are betting inflation will be below 2% a year, otherwise you are guaranteed to be losing money on the investment.

With the huge amounts of debt nearly every Euro country holds and no willingness to cut spending, it seems obvious from recent history their will be much more inflation than that to delay the inevitable.

reply to post by proximo

ah, ok. why do governments borrow money anyways ? wouldnt it be better to not borrow money, so the country does not have to pay interest rates.

I was just wondering whether this latest news is going to tip the scales, when I read this:

BELGIUM: Things Are Getting Worse By The Minute

Dexia - which has been nationalized on taxpayer's expense - is trading around 0.30 EUR a share;
Belgium's interim government (which does not have full authority) finally realizes that the price paid to the French for the Belgian part of Dexia is way too high (4 billion EUR) and, worse, that the guarantees provided by the Belgian tax payer are unrealizable (almost 55 billion EUR). Therefore, they are looking to re-negotiate parts of the deal with France. Why the French would be willing to accept other terms (and risk their AAA-rating) is a mystery for me;

This morning (11/23), Tijd.be (www.tijd.be...) calculated that the sum of all guarantees provided by Belgium to its banking sector amounts to an astonishing 130 billion EUR. To put this number in perspective: Belgium's GDP in 2010 was approx. 353 billion EUR. Let's hope not all of these guarantees will be claimed, otherwise...

Elio Di Rupo (Parti Socialiste) - who was trying to form a new government - offered his resignation to our King Albert II on Monday (11/21) after criticism from the Liberal party (OpenVLD) and other stakeholders (among others: Belgian entrepreneurs) that the proposed reforms are too much "taxing" and too little "reform". This criticism has many followers in the Flemish part of Belgium, much less in the French part (Wallonia). So, after 527 days, it seems like not that much has happened, apart from endless talks about topics which do not impact the everyday lives of the Belgians;

The yield-spread between German/Belgian 10-year bonds is rapdily increasing (300 basispoints +) and our current 10 year yield is exploding higher (as we speak: approx. 5.14%);

After Dexia's share decline brought down Arco (a cooperative related to the Catholic trade union and labor movement which only a couple of weeks ago went bust but, nevertheless, got bailed out by the Belgian taxpayer although technically these were "shareholders" and not "savings-accounts"), today, it seems other cooperatives are getting into serious trouble due to the declining shareprice of the bank in which they were invested. CERA, cooperative which owns shares of Belgian bank and insurance company "KBC Bank" is currently considering if they will apply for a government guarantee. CERA is virtually bankrupt as their KBC-holdings are valued at 31 EUR on their balance sheet while KBC is currently trading around 8,80 EUR.

Business Insider

And back to Germany:

The German government likes to pride itself on its solid finances and claim the country is a safe haven for investors. But Germany's budget management is not nearly as exemplary as it would have people believe, and the national debt is way over the EU's limit. In some respects, Italy's finances are in much better shape.

Government debt as a percentage of GDP is already at more than 80 percent, which compared to other European Union countries is by no means exemplary, but in fact average at best. When it comes to their debt-to-GDP ratios, even ailing countries like Spain are in better shape, with values significantly lower than 80 percent. Critics, irritated by Merkel's and Schäuble's overly confident rhetoric, are beginning to find fault with Europe's self-proclaimed model country. "I think that the level of German debt is troubling," says Luxembourg Prime Minister Jean-Claude Juncker, whose country has a debt-to-GDP ratio of just 20 percent.

Der Spiegel

If we are to believe that Germany is Europe's 'saviour' nation, then that light at the end of the tunnel is beginning to look more and more like an oncoming train.

Originally posted by icepack
reply to post by proximo

 

ah, ok. why do governments borrow money anyways ? wouldnt it be better to not borrow money, so the country does not have to pay interest rates.

Goverments have to borrow because they are spending more then they can take in. You raise the number one question all ATS's ask. Why should the goverment pay intrest on its loans when they control the money supply. Well we cant because we have a nasty little group called the Federal Reserve. Who by law now has control of the money supply and not your goverment. A privet group controls the money. It never goes well.

Yeah this was beginning to break news last night when the auction got started, wow. Wonder why Germany just didn't offer their bonds at a higher rate? What is German's debt to GDP anyway? I would of thought the high bond yields would only be problematic if the country in concern was debt burdened. Well looks like Germany may start losing its shine and won't be the exemplary credit rating that a new euro bond, I mean 'stability bond', can be staked on.

The eternal optimist would say the failed bund auction/rising interest rates - may be evidence that a credible Euro-zone rescue package is quietly in the offing. The increased inflation risk associated with a large scale EU backstop would presumably drive investors out of long-term German debt - in favor of short-term paper from countries like Italy > the backstop having effectively reduced overall credit risk.

But optimists are increasingly hard to come by - eternal, or otherwise.

GL

reply to post by OBE1

Well, there are certainly opportunities to achieve higher returns than bonds at a 1.98% yield.
There are many factors that lead to this failed auction... I'm sure Barroso's talking about possible eurobonds on the same day contributed to the whole thing.

Originally posted by icepack
reply to post by proximo

 

ah, ok. why do governments borrow money anyways ? wouldnt it be better to not borrow money, so the country does not have to pay interest rates.

money does not just fall from the sky and in a fractional reserve system it is created from debt. if the gov't doesn't take out loans from the banks, someone else will have to otherwise the money supply will contract since there are interest payments attached to every single cent ever created in this way.

this scenario means immediate and total economic collapse unless we all learn how to barter effectively at the drop of a hat.

Originally posted by icepack
reply to post by proximo

 

ah, ok. why do governments borrow money anyways ? wouldnt it be better to not borrow money, so the country does not have to pay interest rates.

To answer your question directly - yes of course it would be better if countries didn't borrow money.

Lets take the US for example as to why the federal government needs to borrow.

Last year the federal government spent 3.7 trillion dollars and brought in about 2.1 trillion in all taxes. So if the government does not take out loans, they would have to cut spending by 43% immediately.

So here is how the US spending is divided up:


So Social Security, Welfare/Unemployment, Medicare, Medicaid, and interest on the debt add up to over 60% of our spending. That means cutting defense to zero and EVERYTHING else to ZERO is still is not enough to balance the budget.

So the politicians either have to tell people the truth - their is not enough money to keep paying out Medicare, SS, Medicaid at the same rates and risk being lynched and voted out of office, or they can continue to lie and keep borrowing money trying to pretend like everything will be OK. It will NOT be OK.

Also that money the government is borrowing is being pumped into the economy - it is about 12% of the total economy. So if the government does quit spending, the economy will get much worse - like 20% worse just from that money no longer circulating. This of course also means their tax income will drop as the economy worsens, so they will need to cut even more.

Of course this will not work, there is a limit to the amount anyone is allowed to borrow even the US government. The US is not alone virtually every other country in Europe is running huge deficits as well.

When people don't think they will get paid back, they won't loan, and the US and pretty much all of Europe are about there. So very soon borrowing to cover these government payouts will be impossible, when that happens the world economy will collapse. It is unavoidable, spending has to be cut - and will be whether anyone likes it or not whether it is done voluntarily or the market forces it.

So germany the number 1 ecconomy in europ can't sell it bonds at a low interest rate.
A Stability bond won't be good for germany because it will have to pay other counties
debt, so they won't go for it. there isn't a good reason for the people of the euro-zone
to stay in, the only people who bennifit in the long term from the euro-zone are those
who hold the debt. Any party which runs an anti-euro campain will now get a lot of votes
even if it's the BNP (in england ) or the equivelent elese where. they are setting up of
extreme political parties to get a big free ride out of this, didn't they learn from Hitler
in 1933.

The thing is, 2% is not even inflation so investors are losing money. Sure I can understand people parking their money in these bonds if they are considered safe havens, but when it is not as safe then you should be expecting a bigger return. I guess that is what the problem is here, German bonds are no longer the safe haven.

Revisiting Today's "Failed" Bund Auction: Less Than Meets The Eye

No need to conceive an explanation where simply supply and demand will suffice. And in this case there was not enough demand at prevailing yields. And that in itself is the most ominous explanation because as SocGen concludes, "certain investors are starting to overlook the eurozone altogether".

Originally posted by surrealist
Sure I can understand people parking their money in these bonds if they are considered safe havens, but when it is not as safe then you should be expecting a bigger return. I guess that is what the problem is here, German bonds are no longer the safe haven.

Possibly true and this is why:

Germany continues to resist calls for jointly issued euro government bonds... an option that would presumably raise the country’s borrowing costs if effectively it participated in joint guarantees of debt issued by other euro-zone countries.

Elsa Lignos, currency strategist at RBC.

The brilliant idea to intoduce the Euro wrecked Europe.

Whose great idea was this?

Because it is wrecking the whole world.

I would really like to know who introduced the Euro.

Because, whoever you are, live in shame and ruin.