12th January 2012
Its ‘safe haven' status for investors was confirmed this week with a short-dated, index-linked bund auction that attracted a negative yield. The bonds were issued below inflation, meaning investors are effectively paying the German government to lend to it: "Germany sold 3.9bn euros (£3.2bn) of six-month bonds at an average yield of -0.0122%, the first auction with a negative yield."
This is the continuation of a longer term trend in German government bonds that has seen yields sink to record levels: "Investors flocked to the relative safety of German debt last year as the eurozone crisis worsened, causing 10-year Bund yields to plummet from a high of 3.49 per cent in April to a low of 1.67 per cent in September."
However, recent data has cast some doubt on Germany apparently Teflon-coated economy. Data shows that in the last three months of 2011 the economy contracted by 0.25%, suggesting that the Eurozone crisis is starting to have an impact.
Simon Ward, Henderson's chief economist and Mindful Money blogger says: "Germany faces huge financial costs whether or not the euro holds together. A dissolution would wreck German banks' balance sheets – even the Bundesbank would require recapitalisation as its loans to the rest of the Eurosystem went sour."
This BBC piece points out that Europe's biggest and strongest economy "did however grow by 3% in the whole of 2011, driven mainly by domestic demand." It adds that the economy is above where it was in 2008 and employment is at just 6.8%.
Equally, according to this piece from Reuters: "Most analysts expect that Germany will be able to rebound swiftly from any weakness in the winter months as employment levels remain at high and paltry interest rates persuade consumers to spend rather than save."
But the data has got some analysts worried. In the same piece, Joerg Zeuner, chief economist at VP Bank says: "Germany cannot isolate itself so easily from tensions within the eurozone. In addition the export sector is facing a difficult period given the fall in global demand."
"Another quarter of contraction and thereby a technical recession are distinctly possible. However if there is no further escalation in the euro zone debt crisis the German economy should still grow in 2012, albeit at a moderate 0.5 percent."
Will this weakness have an impact on its ability to bail out the Eurozone? It does not face the debt headwinds of many of its Eurozone peer group, but that is not to say that it is without problems. For example, this piece quotes Eurogroup head Jean-Claude Juncker saying: "In my view, German debt levels are a cause for concern. Germany has higher debt levels than Spain. It's just that here [in Germany] nobody wants to know that."
Juncker's views have got relatively short shrift. Zerohedge was unequivocal in its dismissal: "What could have possessed this pathetic bureaucrat to criticize the only strong country in Europe is beyond imagination, if this is how he hopes to get Germany nervous about its debt levels and agree to monetizing, he is about to get a pretty brutal lesson in what it means to serve Le Bic Mac at 3:15 am on Luxembourg Strasse. Needless to say the Euro is not happy. We anticipate an immediate retraction saying his words were taken out of context as this is noting short of all out war between the EU and Germany."
Certainly Germany is some way down CNBC's list of indebted countries (as measured by external debt burden). Growth may be weak b
ut default looks improbably: "Germany's debt is set this year to decline to 81.1 per cent of GDP, compared to 83.2 per cent last year, according to federal government figures." (And for those who like the raw material).
The German economy may also get a boost from the weakening of the Euro. The single currency has been falling since the start of the year, which is good news for Germany's all-important manufacturing sector. For the time being, Germany still has the economic firepower to keep the Eurozone on track, but its resources are not limitless.
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