The sovereign debt crisis showed alarming signs of spreading to the very heart of the eurozone yesterday as Germany failed to sell a full tranche of new debt to the capital markets, forcing the central bank to step in.
The news came as eurozone manufacturers recorded their worst monthly dive in orders in almost three years in September, fuelling fears of recession across the Continent as the debt crisis spreads to the so-called real economy.
Meanwhile, in Ireland, the finance minister Michael Noonan stressed his determination to push its European partners to agree a plan to ease the country's debt burden, which is on course to hit 118 per cent of GDP in 2013.
The German debt agency had offered €6bn (£5bn) in 10-year Bunds in an auction but only attracted bids for €3.7bn worth of securities. The Bundesbank was forced to retain €2.4bn of bonds, which the central bank plans to sell over the coming days, an outcome Marc Ostwald at Monument Securities called "a complete and utter disaster".
A spokesman for the German finance agency said the failure to sell the full amount reflected a nervous market but stressed that the "result doesn't mean any refinancing bottleneck for the budget".
The effective failure of the auction alarmed markets and hit the euro because Germany has, throughout the crisis, been seen as a safe haven by bond investors. Some suggested that investors were now choosing other countries as refuges for their money.
"It's a strong signal on what the market thinks about German debt. People seeking safety are increasingly turning to Swedish and Norwegian bonds instead," David Thebault, at Global Equities, said.
Speaking of his determination to bring Ireland's debt pile under control, Mr Noonan said: "We as a country have borne a disproportionate share of protecting the European banking system. "It [proposals that Dublin should be given debt relief] is a piece of negotiation outstanding. We've had some technical discussion [with eurozone partners] at a lower level."
Dublin's national debt exploded after the previous Fianna Fail-led administration made a decision in 2009 to bail out the country's overextended banking sector, rather than imposing losses on the bank's bondholders, many of whom are European banks. The Irish budget deficit rose to 32 per cent of GDP in 2010 as a result.
One method of reducing Ireland's debt burden being explored in Dublin is altering the terms of a "promissory note" or IOU that the previous government extended to meet Anglo-Irish's liabilities. The Irish government has signalled that this could reduce Ireland's €110bn sovereign debt by €15bn to €20bn. Dublin is set to pay €17bn interest on the IOU from the European Central Bank, unless rates are renegotiated.
Dublin would need agreement from the ECB as well as the European Council to proceed with the plan. Yet Ireland has registered two quarters of growth this year and is hoping to return to the capital markets next year. Irish officials expressed the hope that Ireland's eurozone partners would be receptive to the plea for debt forgiveness in light of Ireland's determined efforts to bring down its budget deficit under a joint EU/IMF bailout programme. "Europe needs a win. We're well positioned to be that win", one said.