The debt crisis struck at the heart of Europe on Wednesday, as Germany fared surprisingly poorly at a bond auction and its leader feuded with top European Union officials over their push for jointly guaranteed debt.
Germany is Europe's biggest, most solid economy and the linchpin for all bailouts of troubled economies in the 17-nation eurozone. Investors' reticence to buy safe German debt at low interest rates speaks volumes about the uncertainty weighing on the continent, where refinancing conditions for governments and banks are rapidly deteriorating.
The flopped German auction of 10-year bonds caused stocks to drop around the world, including in the United States, and sent the euro sliding to a seven-week low against the dollar. By evening, the euro was trading 1.2 percent lower on the day at $1.3357.
"If Germany can't sell bonds, what is the rest of Europe going to do?" asked Benjamin Reitzes, an analyst at BMO Capital Markets.
It was a surprising new twist to a crisis that has already seen smaller eurozone nations Greece, Portugal and Ireland bailed out and is now threatening much-bigger economies like Italy and Spain.
Adding to Europe's woes, France, the eurozone's second-largest economy, again received a warning that it might lose its top-notch Triple-A credit rating.
The German Financial Agency said the euro6 billion ($8.1 billion) auction met with only 60 percent demand, one of the worst results since the euro's introduction a decade ago.
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.
The bond result also piled the pressure on Germany's bonds in the secondary markets, sending the yield on the country's benchmark ten-year bonds up a hefty 0.20 percentage point to 2.08 percent, its highest level since Oct. 28.
Germany, the world's fourth-largest economy, is seen as the eurozone's most stable pillar and its borrowing rates have been driven down in recent months as investors sought a safe haven from Europe's 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 are appealing. The auction offered only 1.98 percent for investors -- the lowest-ever for Germany's ten-year bond. Germany had offered an interest rate of up to 3.25 percent at previous auctions of 10-year-bonds this year.
Having sold off only euro3.9 billion ($5.22 billion), the German agency kept the remainder to be sold off another day. The agency and the government were quick to stress that its refinancing program was not at risk. "The result does not represent any refinancing squeeze for the emitter," the agency said.
Though Germany is widely lauded as a model for other eurozone economies, its debt burden is relatively high by historical standards at about 81 percent of GDP, so it continually has to tap bond market investors for fresh funds. And since it is the top contributor to the eurozone bailout fund, as other nations' economies worsen, Germany could be forced to come up with higher contributions to the bailout fund.
One advantage Germany has over practically most European economies is that its triple A credit rating is not at threat -- unlike France's. Although France has seen the yield on its ten-year bond rise in recent days to around 3.65 percent, it's still much lower than the near 7 percent rates that have provoked turmoil in Italy and Spain of late. That rate is not considered sustainable in the long run, and is what forced other European nations into bailouts.
On Wednesday, Fitch warned that Europe's second biggest economy is at risk of losing its cherished top-grade if Europe's leaders fail to stop the debt crisis from worsening. It said a "further intensification" of the debt crisis would result in a much sharper economic downturn in France and the 27-nation European Union.
Fitch's warning came two days after another rating agency, Moody's, delivered a similar message.
Wednesday also brought new displays of discord among Europe's leaders.
German Chancellor Angela Merkel and the EU's executive arm clashed openly on the need to issue common bonds uniting the 17 euro nations -- another sign that Europe is divided in dealing with its deepening debt crisis.
Jose Manuel Barroso, the head of the European Commission, promoted the introduction of jointly issued eurobonds, coupled with stricter budgetary discipline, as the best way out of the debt crisis. Eurobonds, he said, "could bring tremendous benefits."
That is not Merkel's view and she publicly rejected the idea for the second day running -- calling the Commission's push "troubling" and "inappropriate." She told lawmakers in Berlin that it was wrong to suggest that a "collectivization of the debt would allow us to overcome the currency union's structural flaws."
Barroso later shot back that it was bad form to kill off a debate before it even started.
"We are trying to have a rational, reasonable, serious -- intellectually and politically serious -- debate," Barroso told reporters in a blunt retort.
Germany has long opposed the use of eurobonds, instead calling on profligate member states to clean up their own finances, which would eventually enable them to borrow at lower rates again.
Proponents argue that eurobonds would immediately ease refinancing for weaker eurozone nations. For Germany, though, it would most likely to lead to higher borrowing costs.
Instead, Merkel reiterated her call for EU treaty changes to guarantee strict enforcement of fiscal and budgetary discipline as "a first step toward a fiscal union."
On this medium-term fix to the crisis, Merkel and Barroso seemed to agree.
"It is quite clear, as things stand at present, if we want to keep a common currency, we need more integrated governance," Barroso said.
The easiest way for Europe to counter its debt problems would be for its economies to grow, automatically lowering its debt ratios and generating more revenue. But that hope was dashed yet again Wednesday as new indicators showed the bloc's economy was in deep trouble.
An impending European recession was evident in the findings of a closely watched survey from the financial information company Markit. Its monthly survey showed that the eurozone contracted for the third month running in November and that the deteriorating economic picture is not just confined to debt-stressed countries such as Greece, but increasingly spreading to stronger economies like Germany and France.
The survey suggests the eurozone will contract at a quarterly rate of 0.6 percent in the fourth quarter.
Further grim news emerged with the surprise announcement that eurozone industrial orders collapsed by a massive 6.4 percent in September from the previous month.
Official figures last week showed that the eurozone only narrowly avoided contracting in the third quarter, growing only 0.2 percent during the period.
Greece, meanwhile, took a step forward in avoiding bankruptcy after the conservative party leader pledged to back the conditions attached to a new financial aid package. Greece's creditors had insisted that party leaders supporting Greece's new interim coalition government must commit in writing to backing the country's new euro130 billion ($174 billion) bailout plan.
The delay by Antonis Samaras in sending the note had delayed the next euro8 billion ($10.7 billion) rescue loan for Greece, without which the country would go bankrupt before Christmas.
Casert reported from Brussels. Geir Moulson in Berlin, Greg Keller in Paris and Nicholas Paphitis in Athens contributed to this report.