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Thursday, 24 May 2012

Should Germany guarantee Greek debt?

The German Central Bank has issued long term bonds with a zero percent coupon rate.  Lenders are effectively paying to lend to Germany, again.  This reflects the real market:  investors are reallocating their funds away from risk to safer, non yielding assets.

The proposed pan European "eurobond" would hide such market interest rate signals, crippling the proper functioning of European capital markets.  Interest rates are simply the price of risk.  Bundling all of Europe's sovereign risks together into common bonds can't remove the bad risks, it would only shuffle them around to hide them for a while.

See Der Spiegel's article "German central bank issues zero-rate bonds", which I acknowledge.

For more links also see the earlier post "Lenders pay to lend money to Germany".

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