Saturday, November 26, 2011

>Euro-zone Debt Crisis: Is It Spreading To Germany?

  • Germany’s failure to find buyers for 35% of its EUR 6bn 10-year bunds sparked concerns that the sovereign debt contagion may be spreading to the strongest of euro zone’s core economies
  • Market reaction was naturally negative for the Euro and risky assets but very positive for the US dollar and US Treasuries
  • Ironically, the spread of contagion to Germany could be the last straw to “force” ECB assume the role as the savior for the Euro-zone debt crisis but there is a risk that ECB only moves into the role after a credit event has occur
The European sovereign debt situation continued to dominate headlines with Germany failing to get bids for 35% of its EUR 6bn of 10-year bunds being offered on 23 November. Is Germany next?

The sovereign debt market mayhem that began more than two years ago in Greece and infected Ireland, Portugal, Italy and Spain, is now threatening France and Belgium and risks spreading to Germany, the euro zone’s biggest economy and the widely regarded back-stop to the European debt crisis. German 10-year bond yield surged 22.9bps to 2.148% (the highest in nearly a month).

Market Reaction Very Positive to US Treasuries and US Dollar, But Negative For Risky Assets Like Euro, Equity and Commodities
US dollar appreciated broadly against the rest of the major currencies on Wednesday (23 Nov) and the euro was put under significant pressure as Germany, the economically strongest market within the euro zone, came under contagion risk. The EUR/USD pair plummeted lower to 1.3343 (from previous session close of 1.3505).

USD Funding Pressures Increase Again For European Banks – Watch This Space
The cost for European banks to fund in USD reached the highest levels since December 2008. The three-month EUR cross-currency basis swap, the rate banks pay to convert euro payments into dollars, widened to 138 basis points below the euro interbank offered rate (Chart 1).