The German government was unable to sell about 35pc of the €6bn (£5bn) 10-year bonds it offered to the market, getting just €3.9bn of debt away. The setback came as Fitch Ratings issued a warning that France’s AAA credit rating would be at risk should the crisis result in a sharper downturn in the country than currently envisaged.
“The sovereign debt crisis may have had its most critical day yet,” said Kathleen Brooks, research director at Forex.com. “If Germany can’t sell debt then where does that leave the eurozone? While we all knew about problems in Italy, Spain and maybe even France, Germany was the black swan no one expected.”
Investors in German government debt were offered just a 2pc return annually over 10 years, despite the escalating risks posed by the sovereign crisis in the region.
There was increasing speculation yesterday that medium and long-term funding in Europe has now completely frozen, and European stock markets fell across the board. The CAC 40 in France closed down 1.7pc and the German DAX fell 1.4pc. The failed auction also sounded alarm bells in the City. Marc Ostwald, strategist at Monument Securities, declared it a “complete and utter disaster”.
The FTSE 100 endured its worst losing streak since 2003. The blue-chip index closed in negative territory – falling 67.04 points to 5139.78 – for an eighth day in a row. According to the FTSE Group, the last time the market fell for more than eight days in a row was between January 15 2003 and January 27 2003, when the blue-chip index fell for nine days.
The European Central Bank said the auction result was due to “technical issues”, which analysts said referred to the German Bundesbank retaining bonds to maintain demand and therefore a low yield, which in turn depresses the so-called repo rates paid by banks to the central bank.
However, analysts said that the result was unintentional, with bunds priced too high in the current environment.
There was more gloomy news for Germany from the manufacturing sector, after the Markit PMI fell to 47.9 in November, from 49.1 in October, where anything below 50 indicates contraction. But the services PMI improved, to 51.4 from 50.6. Yields on 10-year German and French bonds rose to 2.08pc and 3.67pc respectively, while yields on Italian bonds closed at 6.94pc.
French president Nicolas Sarkozy said he was working with the German chancellor, Angela Merkel, on proposals to modify the euro treaties “to avoid countries diverging in budgetary, economic and fiscal matters”.
Meanwhile, Mrs Merkel said that Greece would only receive the next tranche of bail-out funding if parliament committed in writing to austerity.
Fitch’s warning on France was echoed more broadly for the eurozone by Standard & Poor’s, which said credit ratings could come under renewed pressure if large parts of the region fell back into recession next year.