In a piece up at the FT, Mohamed El-Erian points out that the prospect of having to bail out all of Europe threatens Germany’s sovereign balance sheet.
That makes sense, but he uncorks a real howler here:
Sensing the risk that Germany’s balance sheet (and that of the ECB) may continue to be contaminated by someone else’s problems, the markets have started to signal some initial concerns about the country’s fiscal robustness. In addition to some jitters at a recent government bond auction, German interest rates have followed American ones sharply higher even though the two countries’ fiscal paths diverge dramatically.
Apparently El-Erian is of the view that the rise in US rates has something to do with deficit expectations, a point that’s very hard to defend. He might have also noted that even Japanese Government Bonds have seen their yields march higher, which would suggest that it’s a global situation having to do with risk appetite and inflation expectations, with deficits having very little to do with it.
But beyond that, does El-Erian seriously think Germany is in better fiscal shape than the US? The bailout burdens notwithstanding, Germany lacks its own central bank or ability to expand its balance sheet. So it can actually have auction failures, unlike the US.
As we argued last week, Germany may have committed EUicide, just like Ireland and Greece, by cutting itself off from a central bank that it controls. That fact alone makes the country a much less safe sovereign debt risk than the US.
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