Transatlantic Triple-A Conspiracy

Moody’s has warned Germany about a downgrade in credit rating and thereby fuels conspiracy theories: Are the ratings agencies writing the Euro off? It is striking that American rating assessors often ignore negative developments in the U.S. and Japan. It is also clear that the risks for Germany in the Euro crisis are enormous.

Germans love conspiracy theories. An especially popular one relates to the American rating agencies, which are shooting down the Euro with their bad credit ratings. Anyone who thinks that has received fuel: Moody’s is questioning the creditworthiness of Germany. The agency wants to examine the top ratings of the Federal Republic, and the outlook is no longer described as “stable,” but instead was downgraded to “negative.” That is also true for the former paragons – the Netherlands and Luxembourg. All three countries could soon be in danger of a downgrade – up to now they have shone with the best rating, AAA.

As a reason for skepticism, Moody’s cited the growing uncertainty about the outcome of the debt crisis in Europe. It is becoming increasingly probable that Greece will have to leave the Eurozone, and countries like Spain or Italy will require further help. The costs for this would have to be shouldered primarily by economically strong countries like Germany.

“A lesser rating would be damaging to the image of the Federal Republic. But it would not cause great economic damage,” said Andrew Bosomworth, director at Pimco in Germany, the largest investor in government bonds worldwide. The reaction in bond market shows how unshakeable confidence in the German potential is: The rate of return of ten-year Federal bonds only faltered briefly and made a small turn upward – from 1.17 to 1.24 percent. That is less than Great Britain and the U.S. have to pay, though they are more highly indebted.

The AAA Is of Little Concern to Investors

“It is striking that negative developments in the U.S. and Japan are often ignored by the American ratings agencies, but Europe is downgraded in spite of visible progress in fiscal reform,” said Folker Hellmeyer, the chief economist of the Bremen State Bank. Europe is taking up efforts for a better budget balance. “Japan and the U.S. are doing nothing, however.” So is it a conspiracy?

In any case, The war for the AAA is of little interest to the investors. They place their fortune in German bonds without hesitation and even accept a loss of buying power. The degree to which Germany’s status as a safe harbor for the money for nervous investors is uncontested. This can be seen in that [investors] are satisfied with yields that lie under the rate of inflation.

Correspondingly, top politicians of the government have an unruffled reaction to the poorer credit outlook. The appraisal is “fairly short-term if not short-sighted,” said Free Democratic Party’s chairman Rainer Brüderle. “Germany has solid economic growth; the employment situation is outstanding.” The Free Democratic Party’s vice chairman Michael Meister even turned the bad news into good news, “Germany will keep its best rating.”

Wake-Up Call in the Euro-Crisis

Both Brüderle and Meister judge the assessment of Moody’s to be a wake-up call in the euro crisis. “The Federal government has repeatedly alluded to Germany’s debt limit,” said the Free Democratic Party’s chairman. And Meister emphasized, “The negative outlook also shows that Germany cannot be permitted to become overextended.”

The danger that Berlin will take on too much with saving the euro is great; not only American credit watchdogs fear that, but also a host of German economists. “If a country’s level of debt exceeds 90 percent of its yearly economic output, then it slowly becomes unpleasant – we are at 80 percent,” said Stefan Homburg, Director of the Institute for Public Finances at the University of Hannover. “But the guarantees that we have taken on for crisis countries have not yet been calculated in here.” If a country in need of help slips into bankruptcy, the guarantees will come due. Homburg even fears that Germany will already be downgraded before that, namely when the new European Stability Mechanism’s rescue package is ratified. Therefore, he does not consider the warning from Moody’s to be biased; on the contrary, he is surprised that it came so late.

Monetary Union Divides Itself into North and South

The big problem is: No one knows what the future of the monetary union will look like. Will there be a workable rescue package in the near future or not? Will fiscal policy remain under the direction of national parliaments, or will it be centralized on the European level? Above all, however, will 17 countries still count as members of the Euro-Club in the future, or will there be less? As long as such questions remain unanswered, the investors will remain tense, and the ratings agencies critical.

If Greece drops out of the euro, Germany will be left sitting with outstanding bills in the amount of 80 billion euros, which is money that Athens will no longer pay back – or only a very small part. Nevertheless, it will not stop with Greece. Anyone looking at the interest rate developments of the individual euro members can already recognize the split up of the currency union in north and south.

The North would be Germany, France, the Netherlands, Austria, Belgium and Finland. The South encompasses Italy, Spain, Portugal, Ireland and Greece. “If the break is put into effect, the result would be a cancellation of debt for the crisis countries; billions in aid and guarantees would have to be written off,” believes Pimco manager Bosomworth. Then the downgrading of Germany would be unavoidable; the AAA would be lost.

It would be the emergency that the rating agencies are guarding against. The credit assessors don’t want to be caught off guard. And they also know that there is no good time for bad news. It always comes inopportunely.