Euro Debt Magic- nothing up das sleeve

RobertBrusca's picture

The European debt struggle may have just entered a new phase. Don’t blink. Like any classy magician’s trick the idea is to get you looking one place while the real action is going on somewhere else. And that has been the recipe over the past week or so. While everyone has been watching the Spanish and Portuguese debt auctions, with an eye on Italy, and while their bond prices drifted lower and yields drifted higher, the real damage was done in Germany where the German government’s bid-cover ratio on a ten-year bund auction came in less than ‘one.’

The bid cover ratio was not just low, it was less than unity. There was less than one euro bid for each euro of bond auctioned. The German government, while auctioning off the ‘safest bonds in the Zone’ could not sell them all even during a time of stress in the Euro zone.

This is a very interesting development. German 10-Yr bonds compete with US 10-yr notes that are at a 2.03% yield at the moment; at 1.77% the German auction produced a yield even below that in the US and the lowest yield on record for Germany. But it was a yield so low that not enough wanted the bonds any more.

What is this conundrum? If other bonds are so risky that there is a flight to quality how come the flight to quality can’t get off the runway?

The stupid magic trick that is at work here is the realization that a purchase of German bunds is not free of the risk of a purchase of Spanish or Portuguese government debt! Think ricochet! While Germany may be relatively safer than everyone else in the Zone it is still in the Zone and when things go wrong Germany will be tapped to cough up more resources. So Germany is not a pure play in the flight to quality since there is a feedback loop for distress. There is further feedback loop: through the German banking system that is heavily lent up throughout the Zone. It needs more help the more that the rest of Europe ‘goes wrong.’ And if the ECB puts its balance sheet at risk that too brings more risk to Germany as it is a member of the ECB.

While bund yields are below US Treasury yields, US treasury yields are still very low and the US economy is still growing quite solidly unlike Germany where bonds have not only a flight to safety effect going for them but also benefit from recession risk-pricing. Despite all that, Germany was not able to sell all the bonds it wanted to sell at auction.

Since Germany is the financial rock of Europe, its stable base, we have to wonder how stable it is – really –and the rest of the Zone too. At least the failure came at record low yields instead of at high yields. Even Spain and Portugal are selling their debt after all. But this episode reminds us that the e-Zone is a system and in a system there is dependency and there are interrelationships. And this is a point I keep trying to make in different ways. Europe problems are not as simple as German-Good, Greek-bad.

The ECB is making noises that it could start up its bond purchase program again – and that is something that will further deteriorate the ECB balance sheet and aggravate the Germans even as it might help the ‘Portugals’ sand the ‘Spains’ of the Zone.

It’s a good time to keep an eye on Europe, on everyone, since everyone is connected. The BIG MISTAKE that the Germans made was really in pursing their own interests too aggressively. There is something called ‘enlightened self-interest’ and the Germans do not seem to have it. In Japan there is a widespread recognition that you do not want to beat anyone too badly because in any arrangement there is a need to save face especially if there is an ongoing relationship. If there is no room to save face then bad things happen. Bad things are happening in the E-Zone, in part, because Germany has pressed its advantage too aggressively; it did not see the adverse repercussions from its banks over-lending to over-indebted countries nor did it see the repercussions politically of being locked in the same Zone with uncompetitive high-debt neighbors. This is classic case of: Oops there goes the neighborhood, meets, hey, I have a house in this neighborhood!

The Germans focus on their ability to export and by running persistently lower inflation than everyone else they rule that domain. But Germany rules it with such dominance that they themselves are now suffering the blow back from their own success which has undermined their neighbors’ abilities to fend for themselves.

I know a lot of folks just want to laud Germany for their great effort, productive economy etc. but THAT MISSES THE POINT. Germany is a cog in a system. It must mesh; play nice with others. The failure of the Euro system is a failure on the part of all the members. And the German failure is as severe as that of any other member. And we are now seeing the repercussions of Germany not thinking through the implications of its own policy. Actually it’s not a magic trick at all it is a systemic result from a system that has been poorly put together and poorly run.

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fuu's picture

Trollin again eh Bob?

HAhyperion's picture

"When the thunder rumbles

Now the Age of Gold is Dead

And the dreams that we have clung to

will leave us parched and old instead"

The Age of Profanity and gross obscenity reigns supreme.  At least in the last gilded age Berlin had burlesque shows with men peeping up girls skirts and frolicking frauleins and rocking good times.  This time, we only get an endless parade of fascist bankers picking everyone's pockets.  

Did not Thatcher warn "we, the world had to go to war twice..." to keep these people contained.  Soffin is back stopping their own German banks and screw the rest.

Where is the guess mid summer for global collapse or third quarter? 

Negro Primero's picture

"The "twilight zone" itself is not presented as being a tangible plane, but rather a metaphor for the strange circumstances befalling the protagonists"

The Reich's picture

Why would you buy at 1.77% anyhow?

Watson's picture

The Germans are obviously going back to the DEM, the decision 'cover' being the next bailout request (Spain? Greece?).

The whole idea of strengthening Soffin is to properly prepare (in good German fashion) for any resulting strain on their domestic banking system.

Yes, it will put Germany's export prices up, and thus cool their economy - but their economy is doing fine, with low unemployment, rising wages, and (for them) a house price boom.

A return to the DEM is painted as a catastrophe for Germany, but only by those who lose far, far more by such a return. The truth is Germany would experience some moderate pain, comparable to that caused (and tolerated) in the past by the steadily rising DEM.
Food and fuel will still flow, and democracy will remain intact.

On the other hand, Spain and Greece will be in chaos, and lucky to avoid military government.

Merkel will have to go , and at a personal level she is very popular with German citizens.
But not as popular as a return to DEM notes, which German citizens never wanted to lose...


Sandmann's picture

and at a personal level she is very popular with German citizens.


bit like Alec Baldwin in the US really - both winning personalities with huge fan club

Zero Govt's picture

Indeed. Germany must go its own way. The sooner the better (for everyone)

What has failed here in Europe is collectivism/idealism.

This article seems to argue they should limp on together, Germany "being nice" to its bankrupt stupid neighbours... where has being nice got Germany past 30 years? One massive debt-ridden farce

Screw the EU ...or just let it go screw itself


misterc's picture

Germany is the one-eyed leading the blind bunch.

Our debt-to-gdp is 80%. We have unfunded liabilities, a big aging problem we have millions unemployed, we have a real estate bubble fuelled by artificially low rates, etc etc, just like the rest of the Western world. Oh and we have very high taxes, too. Oh, and manufacturing slowly turns to Asia / Eastern Europe for the cheap labor parts. I wonder how this will work out for the not-so-well-educated workers?

My guess would be at the moment that 30% of the German population do well, 50% do ok but the feel the inflation grip, 20% are in bad shape.

Remember, kindergarden fee can be as high as 500,- EUR / month here, that's money you have to earn first, like 850,- EUR to earn before taxes to pay for kindergarden. Basically your wife has to work just for the kindergarden fee & gas for the second car. That's something that angers quite a few middle class people here.

Sandmann's picture

When the average German Worker is paying 10,000 Euros a year in Tax and Social Insurance it is a clear indication he is a Wage Slave for The State. I think misterc should consider the fate of "educated" workers by looking at Britain where 40% those working in The City are Non-British; most British Utilities and Manufacturing Companies and Banks are foreign owned with foreign top management. You have little chance being British to get to the top of a German parent company or a French one or an Italian one - in fact it is more likely to find a German running a company in Britain that to find a Briton anywhere near board level in a German-owned company.

So currently jobs look good for "educated" Germans until Chinese bosses decide they "smell wrong" and remove them from companies they have acquired.


Besides which just how many jobs are there in the Swiss holding company sourcing parts from contract plants globally ?


misterc's picture

The problem is not the nominal amount of taxes, but the percentage. Recently I had my hands on an invoice from the 1980s, VAT was 14% (now 19%), the price for exactly the same service has more than quadrupled since (so much for saving Fiat money).

With the Britons, I'm clueless. A problem seems to be their lack of interest in anything besides Sports & Media. All the Britons I know on a personal level have studied Arts, Media, maybe English literature. That's certainly not the CV one would like to have as CEO. Look at German CEOs. Most of them either have a technical degree or, even better, as Rüdiger Grube from Deutsche Bahn (train company), did an apprenticeship before studying (!).

There was documentary on BBC a while ago, "Is the West bust?". One case was a girl from Britain who studied psychology, now she works at the grocery store. I'm a young lad in my late 20s, too, but my parents here in Germany would have kicked me out if I had proposed to study sociology or Fine Arts or playing the piano. That's an attitude towards education Great Britain still has to acquire, I guess.

Sandmann's picture

You mix with the wrong crowd. Try Imperial College, London which holds more Nobel Prizes than Germany but whose Engineers go to work in The City because engineering is so badly paid and the Ruling Elite confuses Engineers with Mechanics and Pharmacists with Chemists.


Germany has a Guild approach to technical education wherease Britain seeks to break down any professional qualification and debase it. It is cultural and goes back to First World War when piece-rates were used to destroy Craftsmen's Wages in a conspuracy between Employers and the Unskilled Workforce Unions.

Britain is a Society where the Ruling Elite has used the Lumpenproletariat to destroy the Educated Middle Class and Skilled Working Class

steve from virginia's picture


Germany relies on outside sources of credit as do Spain and Greece. The Bundesbank can buy German bunds ....

(cough, cough ... ahem)

The Bundesbank can buy buns ... at the bakery around the corner.

Outside creditors can shun German borrowers and push up rates in Germany: its Target 2 accounts are depleted which limits the firepower of the Bundesbank ... unless they borrow from the ECB!

The German treasury can always issue fiat euros but doing so would (give Greece and the other Eurozone nations the license to do the same thing).

Germany is painted into a euro-corner of its own design.

Oh yeah, peak oil took place in 1998. That is the real problem.

Sandmann's picture

The Bundesbank can buy German bunds ....

(cough, cough ... ahem)

FT Alphaville states however: 

What’s more, if bunds were really that special, this would usually see the Bundesbank intervening in the market to ensure that the specialness eased. Except, the Bundesbank (via the Finanzagentur) has not been seen repo-ing securities in the market since 2009.

If it had the term “Forderungen aus der Wertpapierleihe (nominal verzinslich)” would have appeared in its latest report here.

And just to be sure, we checked with the head of institutional investor relations at the Finance Agency of Federal Republic of Germany earlier this month, who confirmed no reverse repurchases or “stock lending” had taken place since September.

That, alongside the fact that the Bundesbank is retaining an ever greater share of bonds from auction, suggests only one thing to the logical mind. It is the Bundesbank which may be cornering the bund market on purpose. And it’s doing so to ensure that the one last repo rate in Europe that can be controlled remains suppressed.

The rate is important because almost all interbank funding is now done on a secured basis against the best quality collateral. This implies two important points: 1) that the ECB itself has lost control and depends almost entirely on the Bundesbank to enforce its low rate policy target and 2) that the Bundesbank is having to retain more bunds from the market than ever before just to ensure the last functioning repo rate in Europe doesn’t spiral out of control.


Winston Churchill's picture

May I point you to a piece yesterday on The Slog.

Germans bunds are being manipulated by the ECB.

The Germans are very unhappy about it.

Patrick Donnelly's picture

Bob seems to have hit a nerve!


Fact: Germany is part of the contagion. 


So we attack the writer for pointing that out? Interesting attempt to damage that fact. FACT! FACT!

GeneMarchbanks's picture

'Bob seems to have hit a nerve!'

Um, grasping at insane 'theories' is a sign of the terrible collapse of the perceived influence Brusca probably once had.

But I agree with you, Germany is getting on the FEDs nerves.

Like any classy magician’s trick the idea is to get you looking one place while the real action is going on somewhere else.

Clowns on Acid's picture

Patrick - Germany is part of the contagion? Of course they are they are in the Euro Zone....

The issue readers have with Bob's simplistic article is that blaming Germany for not being willing to bend over and take it like a corporal is that they played by the rules of the Treaty. Others did not by not only with their debt proflicay but also by hiding / lying their true indebtedness (Greece as a prime example). FACT.

To suggest that it is Germany's "fault" that they produced efficiently and kept their inflation rate responsibly low is absolutely ridiculous, indeed either low brow or outright sociialist in nature. FACT.

Germany, by being part of the EuroZone is now certainly experiencing the "contagion", but write this Fed inspired drivel deserves the opprobrium that has been meted forth.

Stupid opinions do get "attacked" here on ZH, get used to it.

bank guy in Brussels's picture

Not correct that Germany 'played by the rules of the Treaty' ... Actually, GERMANY was among the FIRST to VIOLATE the EU Treaties, a few years ago when they wanted a little 'stimulus' help to help smooth over their labour market reforms and crank up their export machine.

Germany and France both, the big EU players, quickly violated the 3% deficit rule, but because they are the big cheeses in the EU, there was no talk of 'sanctioning' them.

So it is real hypocrisy for the Germans to be on their recent high horse.

Quoted on ZeroHedge, David Zervos at Jefferies nailed the whole EU situation a few days back.

The bottom line is that Germany and the northern EU countries lent money to the southern EU countries in order to sell northern products and services ... and in the meanwhile stuffed these dodgy loans onto northern Europe's banks, pension, funds and insurance companies.

This is the dirty secret Germany's leaders probably can't yet even admit to themselves.

The bottom line is that German pensions are now half-'funded' by Spanish and Italian bonds and similar ... so Merkel & co., and northern Europe as a whole, have two choices: Let the defaults and EU break-up roll ... which means telling German and northern European citizens that their pensions and social benefits are bust and might need to get cut by half ... leading to revolution ...

Or the Germans can do what they hate, let the ECB print money and inflate like mad ... print the money to take the pressure off of Spain and Italy, print the money to hide from the German people, that they aren't half as wealthy as they thought, print and inflate and pretend they don't know why food and beer prices are going up every month.

'The Ugly Truth for Northern Europeans' -

Sandmann's picture

Actually, GERMANY was among the FIRST to VIOLATE the EU Treaties

You mean MAASTRICHT of course. Yes Germany did not qualify under Maastricht so Theo Waigel in 1997 forced the Bundesbank to revalue its Gold Reserves and book the Surplus over Book into the Government's finances thus reducing the Deficit.  This trick was followed by France and later........Greece. 


First, Mr Waigel suggested raising cash by selling more shares in Deutsche Telekom. Next he rushed to the German Bundesbank to announce plans to revalue Germany’s gold reserves at market prices, generating a big one-off payment to the federal government. These two wheezes could produce huge sums. The government’s shareholding in Deutsche Telekom is worth around DM80 billion ($47 billion), nearly 2% of GDP. And even a relatively conservative revaluation of Germany’s gold would be worth DM30 billion, while a similar revaluation of foreign-exchange reserves could add another DM10 billion.

RobertBrusca's picture

let me correct your spelling error:

that's Mass-Trick

See! Spell it correctly and the deception immediately is removed!

Max Hunter's picture

Good post Bank Guy.  I would only say that the stimulus given to Germany and France during the "crisis" helped and indeed ended up being a growth mechanism.  The money going to the southern countries (obviously) did not have the same effect.

Once again, the Germans have no intention of throwing their manufacturing over the Great Wall of China or given to any other nation for that matter.  Although their position ultimately creates problems for them the fundimental stand is admirable should not condemned..

q99x2's picture

GS and Blythe Masters are cashing your bond investments in on real assets. Good luck collecting.

goforgin's picture

Another excellent article. Keep up the good work.

Peter Pan's picture

Who are the mugs that lend their money unsecured to governments for around 2% ?

Can they please contact me? I will give them 4% in advance yearly with an LVR of less than 50% on prime real estate in Australia. And if that is not enough I can get a whole group together so that it will be worth their while to transact the deal.


ihedgemyhedges's picture

Hey Bob, how's that NFP report working for you??????????  Average workweek????  Not In Labor Force????  Comps to other "recoveries"??????  Typical, overpaid, Ivy League indoctrinated, non-productive, leech, making money off of money adding NOTHING to any real economy "economist".

PS  Money = paper printed by the same overpaid, Ivy League indoctrinated, non-productive, leech, making money off of money adding NOTHING to any real economy guy with a beard "economist".................

PSS All "seasonally" adjusted of course........of course.........

PSSS Get a real job and MAKE SOMETHING!!!!!!!!!!!!!!!!!!!!!!!!!!!!!  Typing is so easy.  See, I just did the same!!!!!!

RobertBrusca's picture

not my biggest worry right now.
Id yous see the Feb trade report?

Try to warp you mind around that.

That report has me worried.

TheDavidRicardo's picture


Any country that borrows $1 Trillion+ for $450 Billion growth, is not growing.

You see Mr. Brusca, there was a paradigm shift in 2008 and obviously most Western trained "economists" missed the shift.  (Of course, if most economists saw the shift from questionably sustainable economies to unstainable economies, it wouldn't be called a paradigm shift.)

Also, I flabbergasted at your EU "were all in this together" socialism slant.  Yes, of course if your neighbor has to foreclose on their house, it can have negative repercussions on me.  But, that foreclosure is the best thing that can happen for the borrower (They get to move on and repair their personal balance sheet), the lender (They get the opportunity to attract a buyer that now can make the house payments) and myself (Because I will potentially have a neighbor how can afford the upkeep on their house and be able to pay the local property taxes.)

Next, this "Germany is not playing fair" is just crazy.  Did you ever consider the other side of the coin, that the PIIGS were the ones not playing fair?  That they were the ones who used the access to cheap credit not for increased efficiencies or R&D, but for a beach house or a new car?  It is incredible that you can look at the data from Europe and come to the conclusions that you do.  I mean, if you were right, THERE WOULDN'T BE ANY PROBLEMS IN THE EU!!!

PS The reason that the bonds in the WHOLE WORLD trade at yeilds that they do is because damn near every central banker in the world has pledged to use their printing presses to buy back the bonds at no risk to the bond holder.  A free lunch, if you will.  (Excecpt, as Econ 101 teaches us, there is no such thing as free lunch. So then who pays?  Mull it over.)

Lednbrass's picture

We have had very little real growth in decades if you factor out what goes on the credit card. Want to make yourself sick? Look up GDP for each year for the last 30 years, then factor out governmental deficit spending and inflation. But hey, the continued injection of borrowed/printed money makes the GDP look a whole lot better and creates one heck of an illusion.

Tuffmug's picture

Looks like the world is finally running out of idiots willing to buy bonds with negative real returns. If only Bernanke and Draghi could print idiots as easily as they counterfeit money.

Seer's picture

As the Chinese run out of kidneys the world's addiction to iCrap will wane and that'll be the real battle- less idiots.

Zero Govt's picture

the iCrap is the good stuff, it's the Microshite/Goofball garbage that's on the wane

alexwest's picture

as far as Germany economy concerned.. its best run economy inw world.. period

# export - 40% of gdp
# positive balance of payments

# in 2012 - deficit is going to be , dont remember the exact figure ' something like 40-50 bln per year.. its WHAT USA FEDERAL GOV prints in just over 1 week..

# lowest rate of unemployment on the record

so go away,, there are enough stupidity over here.. dont need more


Lednbrass's picture

Well, it is a reality that your export success has been greatly enhanced by using a currency that is far weaker then your own would be and  have had demand propped up by massive deficit spending in the rest of the EU that is creating its own problems.

Yes it has worked, but like all good things it will end.

alexwest's picture

# the US economy is still growing quite solidly

hey idiot... if USA economy grew 'quite solidly why we had March/Fed record budget deficits? is it supposed to be more taxable revenues ?

or its because some dickhead PHD economist (just like you) came up w/ GDP formula where goverment spending goes exactly into GDP , so as long as FED prints money to finance 10% of GDP deficit, economy on paper will grow 'quite solidly '

what a hogwash


GDP = private consumption + gross investment + government spending + (exports ? imports)

Peter Pan's picture

You are spot on and this has always been my gripe. The next step will be to realise that GDP is a pathetic measure of GDP because it only counts quantity and not quality. So if some government spends a billion dollars in creating jobs for non-productive pen pushers this is supposed to be just as good as spending money on new infrastructure that might enable people to get to work faster and for less cost.

El Oregonian's picture

John Williams of ShadowStats calculates unemployment at 22.2% so yes you are right, there is NO "Solidly" growing economy.

So thats what a $100,000.00 education buys you? You sir, were robbed.

rwe2late's picture

 Nor in the so-called "private sector" does the "production" of Goldman Sachs, Halliburton, et al have much "quality".

Financial fraud, war machine profiteering, building a Homeland police state, and environmental destruction all are GDP "positive".

There is no inventory reduction for the loss and degradation of either human beings or the environment.


TheDavidRicardo's picture

We have and do export our wealth everday! 

Eireann go Brach's picture

YouR wriTiing sKills aRe fuking terible!

Centurion9.41's picture

Very true.  So much so one wonders who gave him his PhD? 

But, based on his bio, it goes hand-in-hand with explaining some of the outright stupidity seen on Wall Street.

Elwood P Suggins's picture

Doesn't PhD stand for Phoney Degree?

hardcleareye's picture

give it a rest.... limit it to one link a day please.


Thank you


gmrpeabody's picture

WOW..., this is a tough neighborhood.

RobertBrusca's picture

It's just tough to make headway when everyone is smarter than everyone else.

sort of like a dog trying to catch his own tail.

Harmless activity that keeps them off the street... writing under the cover of pretend names so they can be bad boys and not have to fess up to their views. No consequences. No responsibility. Who cares? Is that really a tough neighborhood? Write something critical under your own name and you stand for something, instead of nothing.

By the way love the PhD jokes.

Really high brow guys. You must be from Mensa.