Negative Yield on German Bills Indicates Maximum Level of Panic

Today's auction of German 6 month bills resulted in investors paying a negative yield (see Reuters article). Of course this does not make sense logically, but it has happened before - 3m US Treasury bills were in such high demand in the middle of the financial crisis in late 2008 that the winning bids were so high that yields went negative. In both cases investors are afraid to keep their money in the bank in case it goes bankrupt and would rather pay a fraction of a percentage point for the peace of mind. So either the Eurozone is coming to an end sometime very soon or the panic has reached such proportions that a bounce (in the Euro, as well as Eurozone sovereigns) is coming very soon. I would be tempted to bet on the latter.

The Flip Side of Germany's European Bailouts

Among all the political noise coming out of Europe the main theme seems to be that Germany may have to bail everyone else out and is not too happy about that. While factually true, we should not forget that Germany has been the main beneficiary of the currency union. The estimates of how much stronger the Deutschemark would have been compared to the Euro if it still existed vary between 50% and 100% depending on who is running the models. Either way that would have been terrible news for Germany's economy, which is very dependent on export of capital goods - just take a look at Japan. So given that it has been enjoying all the benefits, Berlin should be more willing to spread the love. In fact it has to do that, or risk an end to its export-lead boom if Europe ever reverts to local currencies.

Has the Euro Become Radioactive?

More and more countries are distancing themselves from the Euro. First were non-Eurozone EU members like Poland pushing off the already agreed-upon adoption. Then Greece was toying with the idea of re-introducing the drachma, and now a politician in Iceland is suggesting that they should scrap their application for joining the Euro and opt for the Canadian dollar instead (read CNBC article here).

It is more of a psychological process than a purely financial one. Eur/Usd is only down 13% from the high of just under 1.50 reached on the day before the ECB failed to raise rates again in early May (what were we thinking??). However the more the crisis drags on, the more psychological capital the common currency loses. Companies are considering contingency plans for pricing their products; central banks are dusting off the printing presses for legacy currencies; brokers and banks are conducting "war games" to make sure they can quote and settle should those currencies come back. With every passing day it appears that the Euro is unlikely to survive in its present form.