Germany’s failed bond auction on Wednesday may lead to movement from Berlin on the subject of Eurobonds when France’s Nicolas Sarkozy meets Angela Merkel today along with Italy’s new leader Mario Monti.
Sarkozy and others want the ECB to have a more decisive crisis-fighting role, something Germany resists, but if its bonds are losing safe haven status the time may have come to think again.
Goverment debt in the eurozone breaks down with the big three, Germany France and Italy, holding nearly three-quarters of the total, but financing it is getting tougher even for the biggest yet most prosperous debtor Germany. Bond investors have effectively gone on strike, and interbank lending is drying up, making banks more dependant on the ECB for funding.
“We need much greater scope for the European Central Bank to intervene and stabilize the secondary market for these stress bonds, and you can only do this if the European Central Bank will issue bonds, eurobonds, jointly guaranteed by all the member states,” says Professor Stefano Micossi of the College Of Europe in Bruges.
The southern eurozone banks are also struggling with a run on funds as nervous depositors and investors pull out, and Germany fears ending up doing the lion’s share of the underwriting of any eurobond. The problem is the longer the crisis goes on the more Berlin finds itself as the last man standing with any spare cash.