As investors have scrambled to find safe havens inside the eurozone, yields on German government bonds have reached historical lows. But that does not mean that investors are completely confident that Germany’s ability to repay its debts will be unaffected by the crisis that has forced four eurozone members to ask for financial help.
The rise in the cost of insuring German government debt against default is a sign of how worried investors have become about the cost to the currency area’s economic powerhouse of funding those bailouts, with the possibility of more to come.
The CDS spread on German bonds is now over 50 basis points above the spread on US treasury bonds, up from around 40 basis points in March. On the basis of its own economic outlook and debts, that gap should not be as wide, traders said.
“It doesn’t make rational sense”, argued a sovereign CDS trader. “Germany should be more like the UK, US even. It should trade around 50 to 70 basis points according to its real economic strength.”
That suggests that it is Germany’s potential exposure to the cost of rescuing other eurozone members that is driving the rise in insurance costs.
Meanwhile, the German government finds itself having to resist increased international pressure to accept some form of mutualisation of eurozone debt liabilities, which would affect its own creditworthiness.
The German government’s debt agency played down the impact on German government debts from growing fiscal problems elsewhere in the eurozone. “I don’t see the risk of a big adjustment for German bond yields in the future”, said a spokesman for the German Finance Agency. “The (bailout) funds do not have an effect on German debt and they will not have an effect, because these two asset classes are totally different.”
He added that the rising cost of insuring against default have nothing to do with German creditworthiness, “because nothing has structurally changed”.
Full article
© Wall Street Journal
Key
Hover over the blue highlighted
text to view the acronym meaning
Hover
over these icons for more information
Comments:
No Comments for this Article