It was bad enough when the problems in the euro zone seemed centered on the peripheral PIIGS (Portugal, Ireland, Italy, Greece and Spain). But now the crisis is closing in on the core euro area countries.
Last week, Fitch’s warned that France’s AAA rating could be in jeopardy if problems in the euro zone intensify because “the increase in government debt has largely exhausted the fiscal space to absorb further adverse shocks without undermining their ‘AAA’ status”. In other words, if the European Financial Stability Facility (the regions bailout fund), were to tap France’s commitment to troubled euro zone countries, it would push the country’s debt to 95% of GDP (at 85% the country already has the largest debt burden of top-rated euro zone countries). And France is the EFSF’s second largest backer (behind Germany)…and French banks have the most exposure to the debt of troubled euro area countries.
But the market isn’t waiting for a ratings agency to guide it…France has already been downgraded by the bond market. The yield on French debt relative to that of Germany recently hit the widest spread in two decades.
But all of that was overshadowed by what has been referred to nothing short of a “disaster” for Germany. Last week an auction of German bonds failed: the country managed to sell only 60% of the offer…nearly the weakest demand for the country’s debt in euro area history. And that left Germany’s central bank to pick up the slack and hold 39% of the supply (€2.356 billion).
German bond auctions have fallen short before…6 of the last 8 auctions left the central bank holding some debt. But last week’s flop amounted to the highest level of unsold debt at a ten-year auction since 1995. And to see a bond auction so undersubscribed, and from what is considered the best paper in the euro zone, is a reminder that no country is immune to the regions problems, and the idea that “Germany could be insulated against market developments was a pipe dream”, according to the head of the European Centre for International Political Economy.
And more than that, it’s an indication of the depth and reach of the crisis when the economic stalwart of the region fails to get bids on its debt; “the systemic crisis in the euro zone is eating its way into countries that are solvent…like Germany. But because they are in the euro zone the crisis is spreading to them”.