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Friday, 25 November 2011 05:52
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Et tu Merkel

Germany's bond fiasco signals no one is really safe



On Monday, Reuters Breakingviews columnist Peter Thal Larsen came up with a new acronym to replace PIGS that rapidly got overtaken by events—after playing with SPIFFINESS to include the likes of France, Finland and the Netherlands, he settled for what a PIMCO portfolio manager called EEG, Everyone Except Germany! On Wednesday, however, the new EEG got a bit of a crack when a routine ¤6 billion auction of German bonds got only a 60% subscription. The immediate reaction was a hike in German yields, from 1.98% to 2.04% and a 1 percentage point fall in the euro.

All of which suggests the panic is spreading, though German spreads are by no means anywhere close to a problem—but Belgian yields are up to 5.5% and the French ones have gone up to 3.7% in the light of the Dexia bailout. The euro remains in trouble, but no one knows what will replace it, and how. Chancellor Merkel, meanwhile, continues to play a very high-stakes game, trying to get European leaders to fall in line on fiscal responsibility before she allows the much-required ECB guarantees. It may work, though the danger

always has been that the greater the delay in providing such guarantees, the larger the problem of poor confidence becomes and the faster it spreads. For now, the Fed has mandated another stress test for US banks, this time with far stricter parameters – an 8% fall in US GDP by the first quarter of 2012 and unemployment rising to 13% in 2013; a special euro test is on the cards for six banks with large trading operations and very large market shocks have been assumed.

A hard landing in China, and more stress tests could be on the anvil.


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