Financial Siegfried Line fails: German bond flop means contagion now spreading to Berlin

November 23, 2011 – GERMANY – A “disastrous” German bond sale on Wednesday sparked fears that Europe’s debt crisis was even starting to threaten Berlin, with the leaders of the euro zone’s two biggest economies still firmly at odds over a longer-term structural solution. 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 like a new downturn in growth or support for banks without endangering its cherished AAA credit status. After one of the least successful debt sales by Europe’s powerhouse economy since the launch of the single currency, the euro fell to 1.336 to the dollar and European shares sank to 7-week lows. “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 Free Democrats (FDP) who are the junior coalition partners, told Reuters. The German debt agency was forced to retain almost half of a sale of 6 billion euros due to a shortage of bids by investors. The result 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. – Reuters  excerpt

Trillions needed to save Europe: In the meantime, Oliver Sarkozy, from the Carlyle Group, commenting on the contagion in Europe said: “The math I’m working with is very simple. In the U.S. banking sector, we had $3 trillion of wholesale funding that needed to be stabilized, and it got stabilized by the implementation of TARP, which saw the U.S. Treasury buy $212 billion worth of preferred in the banking sector to stabilize that $3 trillion, give our banks the time to work through hair problem of the problem assets. In Europe, that $3 trillion is $30 trillion, so if you multiply the $212 by 10, you get the $2.12 trillion. In my view, the issues on the European banks are bigger than the issues on the books of the U.S. Banks. So if you want to stabilize that $30 trillion and in my view it’s not that you want to, it’s that you have to, you do not have a choice, you’re going to have to be at least at 2.1 trillion and I suspect it may need to be more.” –Zerohedge

Bad situation growing worse: Investors began to fear the worst for the Euro after unusually weak demand at an auction for bonds from Germany, the region’s largest economy. One analyst went so far as to put the currency on a “death watch.” Germany sold just 60 percent of the 6 billion Euros in 10-year bunds it brought to auction, about the weakest demand seen for the country’s debt in the currency’s 16-year history, economists said. The rejection of debt from Europe’s safe harbor marks a new stage for the crisis. –CNBC   excerpt

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