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According to the bond markets, the loser in Greek rescue is--drumroll--Germany
07/26/2011 1:04 pm EST
The bond market has spent the last weeks counting up the potential costs of the second Greek rescue package—as well as the first rescue packages for Greece, Ireland, and Portugal—and it doesn’t like the math. The actual $155 billion tacked onto the bill in last week’s proposed plan sure didn’t help.
The problem for the German government bond is that Germany is scheduled to pick up about 27% as its share of the total $525 billion bailout bill—so far. The German economy may be growing faster than the U.S., its budget deficit may be much smaller, and the country’s AAA credit rating much less precarious, but Germany is also a much smaller economy: At a GDP of $2.94 trillion to the U.S. GDP of $14.7 trillion, Germany’s $142 billion “contribution” to the EuroZone’s rescue funds is equal to $710 billion for an economy the size of the United States.
And there’s worry in the bond market that this won’t be the last euro that Germany is asked to pitch into the hat. If Portugal and Ireland need a second rescue—which looks very likely—and if the danger of the crisis spreading to Italy and/or Spain requires action, the EuroZone would look to increase size of the current European Financial Stability Fund. By how much? Some estimates say the fund needs to triple in size. The politics of that are just about impossible—even without adding another trillion euros to the stability fund 61% of Germans oppose giving Greece any relief on its debt and 54% say the euro has brought them mostly disadvantages—but the open-ended nature of a potential German commitment is making the bond market very nervous.
So nervous, in fact that the yield on the Bund is forecast to hit 3.36% by the end of 2011 by economists surveyed by Bloomberg versus a forecast of a 3.5% yield on U.S. 10-year Treasuries by the end of the year. (Yesterday in New York the yield on the Bund was 2.76% and on the 10-year Treasury 2.98%) The spread between German and U.S. 10-year bonds was as wide as 0.53 percentage points in January. The gap was just 0.12 percentage points yesterday morning.
You can also see this same nervousness in the results of recent German bond auctions. Three times this year Germany hasn’t received enough bids for all the bonds it was offering. At the July 13 auction, bids totaled just 1.2 times the amount of bonds offered. That same week the U.S. Treasury attracted bids 3.22 times the amount of bonds offered in a sale of three-year notes.
I certainly wouldn’t call any of this a vote of confidence in the stability of U.S. finances or the financial discipline of the U.S. Congress.
But it is a sign that the bond markets don’t think last week’s deal put an end to the euro debt crisis and that it thinks taxpayers in the stronger EuroZone economies are on the hook for more rescue money in coming quarter
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