The significance I take away from this is the trend - the seven failures of Bund auctions started in the latter half of the year. Before that, we have to go back to 2000 for a failure of the Germans to auction off their paper at the rates they’re trying to achieve. Now we see the Bundesbank taking back about one-third of the auction, rather than allowing the rates to rise. They can’t do that for very long in their situation - they no longer mint their own currency.
They were peddling Bunds at something like 4.68% in June and as rates have come down, they’re having bigger shortfalls and auction failures. What I take away from that is the market is telling them that they’re going to have to expect higher interest rates if they want to peddle their paper - probably signifying that the market perceives more risk in the German banking system than in the US, where we’re able to have over-subscribed auctions at much lower rates.
Since the Germans are the lynchpin of the Euro, this now becomes more complicated. They can’t follow the model of Bernanke. They don’t own their own currency, and there are political implications in the rest of Europe that constrain what the Germans can do.
People are finding out in a hurry that the Euro has a problem and it is this: it is a fiat currency with no clear, single decision making sovereign behind it. Instead, it is backed by this confederation of people who like to talk, talk and talk some more about their problems.
The Euro must unravel at some point, there's no help for it. One cannot possibly (see the US Confederation and ERM for historical details) have a ''unified'' currency wherein the participants all play by different sets of rules.
Italy goes out first, say I, followed by (in no particular order) Spain, Greece, Hungary, and sundry other of the smaller Eastern members. Cyprus have no business being in EMU, but doubtless find it convenient and will almost surely stay. Time frame: 5 years or less, bar some cataclysmic economic upheavel in the interim that effectively coerces the weak/uncooperative EMU members to stay in the Euro.
Note this doesn't mean that there will be no Euro any longer, merely that the number of nations in EMU will decrease unless the EC starts cutting yet more deals for backsliding nations to evade/avoid/ignore Maastricht...in which latter case, which is likely enough, the Euro will be at 85 vs JPY and under 100 vs USD.
I have a brother with big bets in ETFs sponsored by Deutsche Bank and another one of the German banks. Do you think the German bank risk is high enough to warrant getting out of those ETFs for that reason alone?
Another point to add re the risk of ETFs sponsored by German banks: The German government has guaranteed Deutche Bank and just Friday said it would guarantee another.