German bond auction falls short in new euro debt worry

Germany, which has been largely immune from the debt troubles rocking its European neighbors, suffered its own blow Wednesday when a bond auction raised a little more than half the amount that the nation had hoped to borrow.

In what some analysts called Germany’s worst showing in more than a decade, the country was able to raise only $5.2 billion of the $8.1 billion that it had expected, in another sign that even the continent’s biggest economy might have some cracks in its armor.

Despite investors’ reluctance in the bond auction, Germany remains Europe’s haven, and its debt agency said it will try to sell the bonds another day. But the country has become increasingly isolated in Europe by refusing to allow more drastic action on the debt crisis, and more are pointing their fingers at Germany’s own finances, which analysts say are not pristine.

As the German Parliament debates a budget this week, opposition parties have criticized Chancellor Angela Merkel’s government for proposing to raise spending and borrowing next year.

“They have confused a debt brake with a gas pedal,” Sigmar Gabriel, chairman of the opposition Social Democrats, said in Parliament this week. Gabriel was referring to the strict limits that Germany has placed on its borrowing, and which it has suggested that the rest of the euro zone do, too. Germany’s fundraising troubles immediately sent the value of the euro skidding against the dollar. The currency had dropped 1.22 percent, to $1.33, by early Wednesday evening Eastern time.

Germany often treats itself “as though the country had no problems, as though Germany were debt-free and all others had excessive debt,” Jean-Claude Juncker, chairman of the euro group of finance ministers, said in an interview last week with the Bonn General Anzeiger newspaper. “The level of German debt is worrying.”

Germany’s debt stands at 83 percent of its gross domestic product, higher than Spain’s, which is 67 percent, according to International Monetary Fund estimates. Analysts note, however, that Germany’s more robust economy can handle more borrowing than Spain’s.

Germany’s financial planning is raising eyebrows among analysts, although the 2012 budget proposal is only a hair higher than current spending levels, and this year’s deficit will be just half of what had been forecast. The country plans an $8 billion tax cut next year, along with billions more in new spending, and it is reintroducing a full Christmas bonus for civil servants that will cost $670 million.

“The federal government cannot prescribe hard austerity measures in Athens, Rome and Madrid and continue cavalierly to live beyond its own means,” sniffed an editorial in the conservative Berlin daily Die Welt on Tuesday.

The bond auction in Germany bolstered concerns about the country’s economic position.

“When you miss your target by that much, it’s clearly a failure,” said Gary Jenkins, an analyst at Evolution Securities. “But it’s still a long way from joining the other troubled countries.” He said that Germany isn’t invulnerable, but that he had expected that financial problems would have had to hit the rest of the euro zone before they really started to trouble Germany.

The yield, or interest rate, on the bonds that Germany tried to sell Wednesday was 1.98 percent, the lowest ever for the country’s 10-year bonds, and analysts said that might be one reason for the lack of takers. That’s a different problem from those of other European countries whose borrowing costs have spiked in recent weeks. After the auction, yields for similar bonds shot up on the open market, to 2.07 percent.

Also Wednesday, the European Commission proposed allowing individual countries to borrow money with backing from all 17 euro-zone members. None of the proposal’s three options is a “silver bullet,” Olli Rehn, European economic and financial commissioner, said in a news conference in Brussels on Wednesday.

Merkel has rejected any plan that would use German taxpayer money to underwrite other countries’ borrowing. She repeated that opposition in Parliament on Wednesday, calling the European Commission’s proposal “extraordinarily inappropriate.”

“This is precisely what will not work,” Merkel said.

Markets were down Wednesday after Germany’s debt auction. Germany’s DAX closed down 1.4 percent, Britain’s FTSE 100 was down 1.3 percent and France’s CAC 40 was down 1.7 percent.

U.S. markets closed down more than 2 percent on Wednesday. The S&P 500 tumbled 2.2 percent, the Dow Jones industrial average fell 2 percent and the Nasdaq dropped 2.4 percent.

Michael Birnbaum is The Post’s Moscow bureau chief. He previously served as the Berlin correspondent and an education reporter.
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