Investors are wary of the German chancellor, Angela Merkel, who appears to be giving ground to European Central Bank (ECB) President Mario Draghi and his plan to purchase Spanish and Italian bonds to help quell the financial crisis in the eurozone. As a result, they are pulling money out of Bunds and seeking what they see as safer investments.
Bloomberg reported Monday that Merkel (left), who had been strongly opposed to the ECB buying bonds, has been pushed not only abroad but at home by the Social Democratic Party (SDP), the main opposition party to her own. The Social Democrats have called for Germany to shoulder more of the expense in a rescue to prevent the breakup of the euro.
Even a potential challenger to Merkel has voiced support for closer fiscal integration in the form of joint eurozone bonds. Peer Steinbrueck, a former German finance minister who may oppose Merkel in the 2013 election, said Saturday that he supported SPD Chairman Sigmar Gabriel’s recent call for issuance of common eurozone debt and greater fiscal integration.
Steinbrueck dismissed Merkel’s own party’s characterization of common debt issuance as “debt socialism.” He said in the report, “They’re being featherbrained,” and went on to say that the eurozone crisis has already eliminated all but two options for the European Union (EU): surrender of more sovereignty to Europe or regression toward “renationalization.” The latter, he said, “would be a fatal way to go” for export-based Germany.
The pressure has taken its toll; on Aug. 6, Merkel’s deputy spokesman Georg Streiter said she now supports Draghi’s bond buying plan in order to help lower borrowing costs in Spain and Italy. As a result, German Bunds, which have had yields below zero as investors sought them out as a safe haven from the fiscal troubles of the bloc, are now being sold off.
“The risk that Germany will have to issue more debt to finance the bailout is real,” Johannes Jooste said in the report. Jooste, a senior strategist in London at Merrill Lynch Wealth Management, which oversees $1.8 trillion globally and has cut bund holdings since last year, added, “I’m skeptical of investing in zero-yielding paper. I’m not convinced the current yields are justified.”
He is not alone. Rose Ouahba, head of fixed income at Paris-based Carmignac Gestion, which manages about $60 billion, said in the report, “I don’t have a lot of confidence about what is going to happen in Germany.” She divested of Bunds in June and is now relying on Treasuries.