Germany's government and central bank may have had a falling-out over how best to solve the euro crisis, but stock-market traders don't seem to have noticed. Almost all major European equity indexes have surged since early June, as investors look to corporate profits for the yield that is proving elusive in the bond market. "What crisis?'' stock-market investors are saying.
There is optimism that Chancellor Angela Merkel's recent support for the European Central Bank's plan to help lower euro-area bond yields will gradually culminate in Germany's acceptance of mutualized debt. Merkel needs to take baby steps to soften up the electorate in advance of the fall 2013 federal election, when she'll probably seek a third term. Tomorrow in Berlin, she'll begin a media campaign supporting European integration, as voters tire of southern demands for more bailout money. Corporate Germany, which has benefited from an export-friendly currency, is helping sponsor the campaign in a bid to bring taxpayers onboard.
Bond traders are more skeptical than their stock market counterparts as investors accept little or no yield on German government paper, considered a haven in times of turmoil. While European leaders said they are working on a plan to help defuse the debt crisis, bond traders raised bets on euro disintegration, Bloomberg News reported Aug. 20. Speculators holding euro-denominated German government bonds today could expect to make large profits from the foreign-exchange effects of a euro meltdown. It is reasonable to assume that both a return to the deutsche mark or a smaller common-currency zone would make such investments much more valuable.
Stock investors may be taking a short-term view of the euro crisis, viewing Band-Aid solutions -- such as central bank money printing -- as an opportunity to make a fast buck. But bond investors have a longer time horizon, and they see austerity fatigue in southern Europe and national sovereignty as insurmountable hurdles for the common currency. While moral hazard and Maastricht are taboo to fans of European debt pooling, many bond traders are busy writing the euro's requiem.
(David Henry is a Frankfurt-based editor for Bloomberg View.)
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