“That’s a very good result for us,” said a spokesman of Germany’s Federal Finance Agency in Frankfurt, which manages the sales. “It is an impressive illustration of investors’ search for quality.”
But the first time in history the German central bank sold two-year notes to yield zero percent is evidence of how much trouble the rest of Europe is in. The free money for Germany amount to a loss for investors after inflation. Why are bankers willing to lose money on a loan to Germany? Because it isn't Greece. Or Italy. Or Spain.
Germany is not only one of the few growing European economies but its domestic finances are rock solid, unlike its eurozone peers. Spain and Italy are paying more than six percent to borrow, because investors fear they'll default. European bankers, worried about ending up holding worthless paper, have few good options but the Bundesbank.
Seven percent is perceived as the threshold beyond which borrowing becomes unsustainable – Greece, Portugal and Ireland all asked the European Union and International Monetary Fund for financial aid after their borrowing costs breached that threshold.
The zero-interest sale reflects investors' interest in "a return of their money over a return on their money," Rabobank rate strategist Richard McGuire told Reuters.
High interest rates are exacerbating the economic problems in southern Europe. Greece, now in its fifth year of recession, seems more and more likely to leave the eurozone. Even after negotiating a far-reaching debt reduction with private investors earlier this year, the country won’t be able to service the remaining debt. Reuters quoted two Eurogroup officials today confirming that member states are being asked to prepare individual contingency plans for the eventuality of a Greek exit.
While Germany made its record-breaking bond sale, EU leaders prepared for yet another crisis summit. Tonight they are convening for an informal meeting in Brussels to discuss measures to stimulate economic growth in the eurozone. The meeting is seen as the first battle between German Chancellor Angela Merkel, who strictly objects to growth programs financed through additional borrowing, and the new French president, Francois Hollande, unofficial spokesman for the growing group of leaders who advocate credit-based stimulus plans.
Before the meeting, Germany’s deputy finance minister, Thomas Steffen, rejected renewed calls for the introduction of eurobonds – debt securities issued by the eurozone as a whole which in effect would mean that Greece could borrow at the same rate as Germany.
“We would sign up for 100 percent liability for new debt in the euro area,” Steffen said in Berlin today. “We can’t do this, we’re not strong enough economically.”