Germany's auction flop adds to European debt fears

Germany failed to raise as much money as it hoped in its latest bond auction, in a surprising sign that Europe's biggest economy may not be immune from a debt crisis raging across the continent.

A fresh warning that France risks losing its top-notch credit rating and more verbal jousting between German Chancellor Angela Merkel and the EU's top executive arm also fuelled concerns that the bloc is losing the battle to contain a debt crisis that's already seen three countries bailed out and is threatening much-bigger economies like Italy and Spain.

However, it was the unexpected news that Germany, Europe's biggest economy and the linchpin of the bailouts, suffered one of its worst bond auctions ever that really caught the eye. The country's Financial Agency said its latest €6 billion ($8.1 billion) auction of 10-year bonds met with only 60 per cent demand.

German officials cited a record-low yield and the extraordinarily nervous market environment for the auction's failure, but investors took it as a warning sign that the crisis might even cause trouble to rock-solid Germany.

"If Germany can't sell bonds, what is the rest of Europe going to do?" asked Benjamin Reitzes, an analyst at BMO Capital Markets.

The auction result hit stocks hard, including in the US, and sent the euro sliding to seven-week dollar lows. By early evening, it was trading 1.2 per cent lower on the day at $1.3354.

It also piled the pressure on Germany's bonds in the secondary markets, sending the yield on the country's benchmark 10-year bonds up a hefty 0.20 percentage point to 2.08 per cent, its highest level since October 28.

Germany, the world's fourth-largest economy, is seen as the 17-nation Eurozone's most stable pillar and its borrowing rates have been driven down in recent months by high demand from investors seeking shelter from the sprawling debt crisis.

That may partly explain why it suffered what many in the markets are describing as a "failed auction" - investors may be beginning to think twice about whether the returns on offer are appealing.

Offering only 1.98 per cent, the auction's yield was the lowest-ever for Germany's 10-year bond. Germany offered an interest rate of up to 3.25 per cent at previous auctions of 10-year-bonds this year.

Even so, analysts called the result worrying, though the German government stressed that its refinancing was not at risk.