For any government looking to raise money in the capital markets in the next few months, there was an ominous development in Germany this week.
A German 10-year bond auction failed – something more or less unheard of until this year – as cash-strapped banks and investors snubbed the government offering.
It is a clear sign of straitened times when a benchmark bond in one of the most liquid markets in the world cannot attract enough bids to reach its target amount.
Crucially, it raises serious doubts about whether governments can raise the vast amounts of debt needed to fund fiscal stimulus packages and bank recapitalisations in the current tough market conditions.
Any sign of waning demand may force up bond yields – putting further pressure on public finances when they are already under strain.
The funding requirements are staggering - the FT again:
US Treasury bond supply is expected to hit record levels, in a range from $1,400bn to $1,750bn in the 2009 financial year, starting in October. In Europe, bond supply is forecast to rise to more €1,000bn ($1,247bn) next year – also a record high, according to Barclays Capital.And those are just the sovereign bond issues. What about corporate bonds? This from The Economist:
In Europe S&P reckons that some $2.1 trillion of corporate debt will mature between the last quarter of 2008 and the end of 2011. With governments also likely to tap the debt markets heavily, investors may be worried about the prospect of their portfolios being weighed down by fixed-income assets.
A trillion dollars here a trillion dollars there and pretty soon you're talking serious money. And investors are starting to notice. The CDS (Credit Default Swap) spread - a measure of market perceptions of default risks and the consequent premium they charge as 'insurance' - are high and rising for all sovereign debt: including the USA, UK and Germany. Some, such as Willem Buiter, see this as the markets beginning to worry about the next Iceland.
Meanwhile into this gathering storm sails the charming tugboat Ireland Inc, merely looking for a few billion to tide its government and its banks over for the next few years. If we're lucky (and let's face, we've been extremely lucky so far), we might just sail through unnoticed - our requirements a mere rounding error in the global scheme of things. If we're unlucky, we could end up like Iceland. We really don't want to go there.
Finally, if all these three-letter-acronyms (like CDS) are getting to you, here's a truly brilliant piece on how we got into this mess in the first place (HT to Stephen Kinsella for the link). It's almost Steinbeckian in its evocation of an era that ended, er, two months ago. Speaking of Steinbeck, I think it will be the artists not economists (sorry guys) who tell the real story of these extraordinary times. Just as The Grapes of Wrath came to portray the Great Depression for future generations.
Only today's artists won't use novels to weave their art - they'll use YouTube, like this extraordinary piece: