Six months ago, way back when Greece and Ireland seemed to be the only disgraces in the European Union, I questioned the motive behind Germany's ban on purchases of German credit-default swaps. Although I figured the move was smart for Germany, I felt it tried to bury the strong possibility that future bailouts would be needed and it attempted to mask the pressing need of the eurozone to raise more capital.
Needless to say, I was right. And I don't get to say that often so let me enjoy my moment.
Not only has Germany given up its perch as a safe-haven investment, but it also is beginning to show some early signs of trouble. Now don't misconstrue what I'm saying as "Germany is going to default," because I am not anywhere near saying that. What I am saying is that Germany's status as a AAA-rated lender is in serious jeopardy, as is the growth outlook for the entire region.
Of particular interest has been the lack of recent buyers of German debt. In late November, one particular auction of German bonds only generated 3.9 billion euros -- 35% below the target for the auction of 6 billion euros. It also marked the lowest total bids to the amount sold to investors in 12 years.
This distressing auction really wasn't anything to be surprised about. In fact, six of the past eight auctions have failed to yield the target euro amount that the country has attempted to raise, which has necessitated the Bundesbank to take action. The concern here is pretty simple: If the strongest country in the EU is having a problem raising capital, then what sort of demand can we expect for countries like Italy that are currently perched on the threshold of needing financial assistance?
Despite the series of unsuccessful bond auctions, the 10-year German bonds have jumped by only 20 basis points. The effects of Germany's troubles can actually be better seen by the countries it holds significant amounts of sovereign debt in -- Italy and Spain. Italy's 10-year bond rate of 6.69% is dangerously close to the dreaded 7% perch that has relegated Portugal, Ireland, and Greece to seeking financial assistance. Spain has also been dealing with exceptionally high borrowing rates. Even with rates 100 basis points off their November highs, Spain is going to have difficulty meeting rates of 5.7% given the likelihood of stringent austerity measures.
This pretty much illustrates just how widespread this debt crisis in Europe has become. It definitely is making me think twice before considering an investment in foreign money center banks such as Deutsche Bank (NYSE: DB ) , Credit Suisse (NYSE: CS ) , UBS (NYSE: UBS ) , or Banco Santander (NYSE: STD ) regardless of how cheap they may appear on paper.
Whether we want to believe it or not, it could be time to break out the caution tape around Germany and avoid investing directly in the EU altogether.
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