Germany is quickly turning themselves into public enemy numero uno. One thing about this morning’s German bond auction that appears to be flying under the radar is that Germany actually bought 40% of their own bond issuance. This is not unusual for a German bond auctions as they generally “save” 10-20% of issuance. What’s unusual is the sheer size. Les Echos reports:
“The “Finanzagentur”, which is in charge of the German debt and wanted to put 6 billion of a new strain 10-year bond, which has managed to sell 3.64 billion euros of securities to investors. The rest was taken by the Bundesbank, the German central bank, which will sell over the water on the secondary market. “The Buba took 39% of the auction is an entirely new level,” said Cyril Regnat at Natixis. Ironically, Germany, which is opposed to the European Central Bank (ECB) purchases sovereign debt, calls on its national central bank to “save” the auctions of debt when investors do not present.”
The FT’s Izabella Kaminska previously described some of the details behind the scenes this morning. But something more sinister is going on here. Germany is essentially doing exactly what they refuse to let the ECB do by targeting rates. They’re merely doing it under the guise of another name. In an email Marshall Auerback describes precisely what the hypocritical Germans are doing here:
“FT Alphaville says the Bundesbank is deliberately cornering the BUND market to suppress the repo rate. Otherwise everything would spiral out of control.
In other words, they are doing what they have hitherto expressly forbidden the ECB to do. Ultimately, the ECB will intervene. They’ll do so on some spurious “price transmission mechanism” rationale, or on the grounds that they are simply providing liquidity to banks (as opposed to bailing out national sovereigns), but functionally, it will amount to the same thing. And look at how the ECB’s balance sheet has been expanding recently.
The political quid pro quo (as Hannibal Lecter might have said) is that the Germans will ultimately assume responsibility for most of Europe’s fiscal policy. The irony is that if the Germans do what they claim to want to do, their own economy will collapse in the absence of some countervailing fiscal thrust, because their external sector will suffer and by accounting identity that means that something else has to give. They don’t seem to quite understand ex ante sectoral balances yet. They probably think it’s a dirty Keynesian plot, rather than simple double entry bookkeeping, which has been in place since the time of the Medici.”
This is beginning to get very interesting. What will the other national central banks make of this? And better yet, what will they do about it? If Germany is seen as being in direct violation of the Maastricht Treaty then the entire charade becomes a violation of such magnitude that all nations involved have to begin wondering why they’re abiding by the German austerity plan while also adhering to the German rule of no ECB engagement in periphery bond markets? The mess in Europe just got a lot more interesting. We’re headed in one direction fast at this point – total unraveling or total fiscal union. I don’t know which one, but I have to say that, given the political shenanigans and now the direct monetary shenanigans a massive game of “every man for himself” appears to be emerging. That is not a good sign.
* Updated for clarification.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.