Here is another thing I do not get:
According to "Mr Market" and the "Bond Vigilantes", any time that one of PIIGS slips further into the abyss, German debt, known as Bunds, are bought as a safe haven.
As the demand increases, prices rise and the yield, or effective interest rates paid on the debt, fall. (The yield has an inverse relationship to price. When nobody wants them, the price falls and the interest rate, or yield, rises; as in Greek bonds that yield 25%)
If Germany is viewed as a sound, "safe" economy, this makes sense.
My question is why do the investors believe Germany is safe? History shows otherwise:
There are few countries in Europe that have a financial history as colourful as the German hyper- inflation of 1920- 1924. However, in 1933, as soon as the Nazi's gained power, Germany defaulted again, and let us not forget the currency reform of 1948 that wiped out all internal debt.
In fact, the historical record shows that since 1830, every single time Germany has had a credit crisis it has been solved by defaulting on the debt owed to investors.
Furthermore, and perhaps more interesting in today's world, it is the Germans calling for Greece to default on their debts.
Now, how prudent is it to lend money to an entity that is openly calling for everybody else not to pay their debts?
If German politicians are so Blasé about the sanctity of contracts, and the historic record makes them a serial offender, surely there must be added tail risk on German debt and it is far from being a safe haven?
Even the Germans know it:
Germany, economic historian Albrecht Ritschl interviewd by Der Spiegel:
SPIEGEL ONLINE: If there was a list of the worst global bankruptcies in history, where would Germany rank?
Ritschl: Germany is king when it comes to debt. Calculated based on the amount of losses compared to economic performance, Germany was the biggest debt transgressor of the 20th century.
