Analysis: Some draw hope from rare German weakness

Thu Nov 24, 2011 2:10pm EST
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By Luke Baker

BRUSSELS (Reuters) - Wednesday's failed bond auction in Germany may mark the moment the penny dropped for Berlin. That, at least, is the hope of some of its European partners.

While Greece, Ireland and Portugal have had to suffer the ignominy of taking bailouts from the EU and IMF, and Spain, Italy and France are now firmly in the firing line, Europe's most powerful economy has remained above the fray.

But the inability to sell nearly 40 percent of the bonds offered at an auction of 10-year Bunds has suddenly revealed a chink in Germany's armor, with implications not just for the markets, but for the politics of Europe's debt crisis too.

At one level the auction was not so bad -- no other euro zone country can sell 10-year debt at a yield below 2 percent in the current environment, and if a few more basis points had been offered the 6 billion euros of bonds would have sold without a hitch -- but at other levels, deep problems lurk.

The very image of German debt management superiority has been called into question, and by extension so have some of the more rigid positions that German Chancellor Angela Merkel has adopted over the course of the debt unrest.

Other euro zone states -- most particularly France -- will now feel emboldened in challenging Germany's resistance to ideas such as the European Central Bank playing a more direct role in firefighting the crisis and to jointly issued euro zone bonds.

French President Nicolas Sarkozy met Merkel and newly appointed Italian Prime Minister Mario Monti in the French city of Strasbourg on Thursday, with the ECB's role at the heart of discussions.

"All the pressure is mounting in one direction, and that's for Germany to reduce its opposition to large scale ECB intervention and on eurobonds," said Sony Kapoor, the managing director of Re-Define, an economic think-tank.   Continued...