For now at least Germany and Greece share the same currency. But don't tell that to investors. On Wednesday the German Finance Ministry pulled off a remarkable feat for a country in a threatened currency union: It issued €4.6 billion of two year bonds with a rate of zero percent. In other words, once inflation is factored in, investors are essentially paying to park their money with the German government.
Because of the strength of its economy, Germany has emerged as a significant benefactor from the problems being experienced by Greece as well as Spain, Italy and Portugal. In Greece worries that a government uncooperative with the European Central Bank could come to power after next month's election forcing an exit from the euro zone has investors as well as ordinary citizens pulling their money out in droves. In Spain concerns over the health of the banking sector have driven up borrowing costs.
According to German officials on Wednesday, demand for the zero percent bonds was robust and added that Germany does not intend to offer up bonds with a negative interest rate. "As such, a coupon of zero percent is the lower limit," Reuters quoted a finance official as saying.
Still, it seems likely that, with investors looking for safe havens for their money, even negative interest rate bonds might sell. "Many investors are putting their money only in places where they are guaranteed to get it back," Commerzbank analyst Alexander Aldinger told the Berliner Morgenpost. "For a large degree of security, investors are willing to give up returns."
Even while borrowing costs have spiked in other euro-zone countries, rates on shorter term German bonds have already hit zero and even ventured into negative territory, meaning investors have been paying the German government to hang on to their cash. Rates on longer-term bonds have been trading consistently below the rate of inflation.
The zero percent bond issue is just the latest sign that concern about the crisis facing Europe's common currency is rampant. As are worries that the situation could become much worse before it gets any better.
In this season of concern, low interest rates on two-year bonds are hardly out of the ordinary as investors focus more on conserving capital than growing it. US two-year bonds offer an interest rate of 0.29 percent while the same bonds in Japan produce a 0.1 percent rate. According to the German daily Frankfurter Allgemeine Zeitung, the Finance Ministry in Berlin won't say whether future bond issues will also be at zero percent.
Yet even as investors seek safety, analysts are concerned that the low interest rates will produce a bubble. "If this isn't a speculation bubble, then I don't know what a speculation bubble is," Marc Oswald, research analyst at Monument Securities, told the Berlin daily Morgenpost. He expects the move to drive investors towards hard assets like real estate, gold and art. Pension funds and other institutional investors will suffer, however, as they are required to put a certain percentage of their assets into state bonds.
Oswald also says that the move is a sign that paper money has no meaning anymore. Pretty soon, he says, central banks could be forced to step back in time to the 1970's when gold anchored paper money.