Merkel seeks bond co-ordination

Angela Merkel has called for global co-ordination of debt issuance to ensure that governments do not drive up borrowing costs by competing against each other in the capital markets.

The German chancellor’s comments highlight worries about large volumes of global government bond issuance. A record $3,000bn (€2,350bn, £2,090bn) of debt is expected to be raised in government bonds this year – three times that in 2008.

“The many government bonds that have to be placed at the moment by various states is leading to difficult situations around the globe,� Ms Merkel said.

“Imagine an extreme case if all states were to issue huge bonds on the same day, then states would be competing for good credit conditions with each other.�

The chancellor said it would be interesting to discuss how far bond issuance could be co-ordinated, “not just in the eurozone but with regards to all the bonds being issued round the globe�.

The issue had come up at a meeting of European leaders in Berlin on Sunday, she said.

Ms Merkel’s comments come as Germany faces growing pressure to help other weaker eurozone economies that have seen their borrowing costs spiral compared with Berlin since the start of the financial crisis.

German officials have already ruled out hopes among some of the smaller nations that the eurozone could issue a joint bond. This is because it would increase the interest rates Germany would have to pay on its debt, although it would lower those of the smaller nations.

Analysts say Ms Merkel may have made the comments in an attempt to show that Berlin was at least trying to help its eurozone neighbours as government debt managers already co-ordinate issuance.

One debt manager said on Thursday: “The calendars for bond auctions for Germany, France, Italy and the UK are known by all of us. We talk to each other regularly, and it is simply common sense not to issue on the same day.�

The problems for the smaller economies were highlighted this week when Ireland issued a three-year bond at nearly 2.5 percentage points over equivalent Bunds. Before the credit crisis, Irish bonds traded at about the same level as German securities.

The problems for crowded capital markets has worried investors and bankers since the first fiscal stimulus plans were announced in October.

Even Germany, which has the biggest and most liquid bond market in Europe, has faced difficulties this year. Two 10-year German Bund auctions have failed already in 2009, leaving its finance agency unable to raise as much money as it had hoped.

But markets have by and large managed to absorb the big volumes of government debt with yields close to historic lows as safe, or risk-free sovereign bonds, are attractive in times of stress.

Debt managers say problems may emerge when the economies start to revive and other riskier assets become more attractive, leading investors to switch out of government debt.