"Disastrous" bond sale shakes confidence in Germany

Wed Nov 23, 2011 2:00pm EST
 
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By Stephen Brown and Noah Barkin

BERLIN (Reuters) - A "disastrous" German bond sale on Wednesday sparked fears that Europe's debt crisis was starting to threaten even Berlin, with the leaders of the euro zone's two biggest economies still at odds over a longer-term structural solution.

With contagion spreading, a majority of twenty prominent economists polled by Reuters predicted that the euro zone was unlikely to survive the crisis in its current form, with some envisaging a "core" group that would exclude Greece.

Investors were also unnerved by reports that Belgium is leaning on France to pay more into emergency support for failed lender Dexia under a 90-billion-euro ($120-billion) 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, such as a new downturn in growth or support for banks, without endangering its triple-A credit status.

"The debt crisis is burrowing ever deeper, like a worm, and is now reaching Germany," one of the more eurosceptic backbenchers in Angela Merkel's center-right government, Frank Schaeffler of the junior coalition partner Free Democrats (FDP), told Reuters.

The German debt agency could not find buyers for almost half a bond sale of 6 billion euros. That 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 percent interest rate - the lowest ever on an issue of German 10-year Bunds. The auction's average yield was 1.98 percent, down from 2.09 percent for the previous benchmark in October.   Continued...