The Great Debate UK
Wednesday’s panic in the bond markets drove yields down to unprecedented lows in U.S., UK and Germany. The stampede into British and American debt is no surprise, since both countries represent a rock-solid guarantee of repayment in their own currency (though heaven knows how much lenders will be able to buy with the money in ten or twenty years’ time), but why the rush into Bunds?
One possible interpretation, which can never be discounted, is pure panic, based on nothing more rational than faith in Germany’s sleek cars, orderly cities and conservative bankers. But that is unlikely to be the whole story, if only because the trend has been apparent for too long to be put down to knee-jerk reaction.
The only other plausible interpretation is that the market is now betting on a euro zone break-up.
Look at it this way. The one thing which seems to be unanimously agreed is that the euro zone can only survive if Germany shoulders a substantial share of the outstanding ClubMed debt burden. Nobody can invent a solution which does not amount to the same bottom line – Germany underwrites borrowing by member country governments, or lends directly to them, or underwrites loans by the firewall-type institutions with the confusing acronyms, or agrees to backstop German bank lending to the troubled countries, or borrowing by Spanish banks or…