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Black swan over Berlin puts euro on the brink

The eurozone debt crisis has finally hit the core and the euro is barely moving. That surely can’t last.

A dismal bund market auction has brought the crisis closer to home and will raise pressure on Berlin to put forward more radical plans to calm eurozone debt fears. Perhaps it is the hope that Germany will start to play ball with its eurozone partners over finding a lasting solution to the crisis that is lending the euro some modicum of support.

EURUSD pushed down through – admittedly very stubborn – bids around $1.3420, but failed to break down through $1.3350.

Although the euro’s resilience most likely reflects a degree of tactical short covering, it would hardly seem to indicate the severity of the situation facing the single currency.

Until now, Germany has been in a position of strength. Berlin, remaining to a large extent insulated against the eurozone debt crisis, has strongly opposed increased sovereign backing of the EFSF and disregarded calls for Eurobonds, as well as greater involvement from the European Central Bank (ECB).

However, that has to change if the euro is not to slide into freefall.

It was not just the sixth German auction of the last eight to be technically uncovered; the retained portion was far higher than usual (39.3%) and the bid to cover was the weakest on record since 1999.

This is a worrying situation.

“Risky assets are still vulnerable and this deterioration in sentiment will cause bouts of volatility into year end,” says Kathleen Brooks, research director at

“If Germany can’t sell debt, then where does that leave the eurozone? While we all knew about problems in Italy, Spain and maybe even France, Germany was the black swan that no one expected – well not this soon, anyway.”

The problem is that Germany is the market’s best hope of finding a way to recapitalise the eurozone, and if its access to funding is jeopardised then this threatens to push the whole debt crisis spiralling out of control.

The ECB puts the result of the auction down to “technical issues”, and it is true that it is not unusual for Germany to retain a portion of the amount on offer at the auction.

However, the elevated level of retention and the fact that investor demand was disappointing reflects worries over Germany’s ability to become the banker for the rest of Europe.

Bond investors have, in effect, lost patience with European authorities’ ability to solve the debt crisis and are staging a buyers’ strike at the heart of the eurozone.

Optimism that the auction result might trigger another round of massive intervention by EU or ECB officials that finally gets them ahead of the curve of the debt crisis would seem to be lending EURUSD some support.

However, experience of officials’ efforts to date to settle the market’s nerves suggest the October low of $1.3146 in EURUSD looks vulnerable.

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