Storm Shelter

Panicked Investors Take Haven in Germany

angst at market
Frenzy at the Frankfurt stock exchange.
  • Why it matters

    Why it matters

    Is the flight into safe-haven German government bonds and out of peripheral euro zone bonds a repeat of the 2012 euro debt crisis?

  • Facts

    Facts

    • In addition to reduced growth forecasts for Germany and the euro zone, fears have mounted the U.S. economy is also slowing down after weak economic data.
    • German 10-year yields fell to a record low of 0.73 percent on Wednesday.
    • Greek 10-year yields rose to almost 7.5 percent and Greek stocks fell 6.8 percent, the biggest one-day loss since July 2012.
  • Audio

    Audio

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It almost looked as if the euro debt crisis was back front and center. Greek 10-year bond yields on Wednesday saw their biggest rise in more than eight months, while German debt was in high demand, just as it was during the single currency’s crisis back in 2012.

But the deja vu stopped there, analysts said. The steep declines in Germany’s bellwether DAX Index, which has fallen nearly 4 percent since Wednesday, is a reflection of weaker global growth, the Ebola epidemic, the Ukraine conflict and renewed worries about the recovery of Greece.

“There is a general uncertainty that is being pushed by political crises such as in Ukraine or with the Islamic State,“ said Timo Klein, a senior European economist with IHS Global in Frankfurt in an interview with Handelsblatt Global Edition. “The reason for the spread between German and Greek bonds is not due to a deterioration in euro zone countries but a general mood swing on the market.”

“When the ECB sees that inflation doesn’t go up, it will be likely that they start buying bonds. And investors are currently preparing for that.””

Christian Lenk, Analyst at Germany's DZ Bank

Greece revived worries about its intentions when its prime minister said it may try to leave the European bailout program early ahead of possible snap elections in the country next year. Greece’s debt pile is about 175 percent of its economic output.

The combined worries weighed on financial markets for a second day on Thursday, with the DAX down at 12p.m. in Frankfurt by 0.8 percent, after falling 2.9 percent on Wednesday. The swing was set in motion by declines in the Dow Jones Industrial Average in the United States, which gave up gains yesterday.

On Wednesday, 10-year Greek bond yields rose by 0.7 basis points to almost 7.5 percent. German bonds yields fell to a record low of 0.73 percent, meaning the difference, or spread, between the two countries’ bonds widened to almost 7 percent.

The widening spread between German and euro zone peripheral bonds recalled the debt crisis that rocked Europe in 2011 and 2012, when investors speculated on a break-up of the single currency. Greece, Spain, Portugal and Ireland had to be bailed out by other European countries and the International Monetary Fund.

 

Yields on German and Greek-Bonds-2008-Oct-2014-01

 

Christian Lenk, a Greece expert and analyst at Germany’s DZ Bank, said the turmoil on Greece’s bond market and the slump in Greek stocks, which made their biggest drop since 2012, were not indicators of a new euro crisis. The market scare was more attributable to the Greek government’s intention to end the bailout agreements with the IMF, European Central Bank and European Commission, he said.

“Prime Minister Antonis Samaras is planning to leave the bailout program earlier than planned, because the government is under pressure to win next year’s possible snap elections and to show voters that their course has been successful,” Mr. Lenk told Handelsblatt Global Edition.

Greek snap elections could take place in early 2015 if the government can’t push through its candidate in the presidential election. The opposition radical-left party is currently ahead in the polls, Mr. Lenk added.

Fears have also mounted after the German government and the International Monetary Fund  released reduced growth forecasts for Germany and the euro zone last week. In addition, the U.S. economy is at risk of also slowing down following weak data on retail sales and producer prices that were released on Wednesday.

 

Greece-GDP-growth-2010-2015-source-European-Commission-Debt-level-2009-2013-Source-Eurostat

“At the same time, we have very, very low inflation, so that the market looks like it is running into a sort of Japan-like scenario,” said Mr. Lenk of DZ Bank, referring to the Asian country’s decade of little or no growth in the 1990s.

Slow growth, weak inflation and a tendency to deflation in some euro countries all suggest the European Central Bank may consider introducing quantitative easing, the flooding of financial markets with cash through the mass purchase of bonds and other securities, Mr. Lenk said.

“When the ECB sees that inflation doesn’t go up soon, then it will be more likely that they will start buying bonds massively,” he said. “And investors are currently preparing for that.”

The “Volatility Index” (VIX) in the United States, a measure of market nervousness, rose by 21 percent by Wednesday to its highest level since 2011.

 

Franziska Scheven and Gilbert Kreijger are editors for Handelsblatt Global Edition in Berlin, covering companies and markets. To contact the authors: scheven@handelsblatt.com and kreijger@handelsblatt.com 

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