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A Brouhaha over German Bond Ratings

It was more than the Germans could bear. On Feb. 21, Standard & Poor's analysts cut the rating of ThyssenKrupp, the German steel- and capital-goods manufacturer by two notches, to junk bond status. Thyssen executives first angrily denounced the downgrade to BB+ as "incomprehensible." Then they called in backup.

The result: The politicians have joined the chorus of criticism. Some pols even want a new "European" ratings agency. "The [agencies'] growing power in this country is a real problem," says Joachim Poss, a financial affairs spokesman for Chancellor Gerhard Schr?der's Social Democrats.

ThyssenKrupp and other companies are relying more and more on the bond markets to raise capital these days, and a poor rating costs them money in the form of higher coupon rates. Under new international banking regulations, known as Basel II, which will take effect in 2005, a poor rating could also result in higher rates on bank loans. The Germans accuse Standard & Poor's, which like BusinessWeek is a division of the McGraw-Hill Companies, and its New York crosstown rival, Moody's Investors Service, of failing to understand European business culture. They also hint that the downgrade might be linked to the political spat between Berlin and Washington over Iraq.

Dietrich Jahn, a senior official at the Finance Ministry, suggests that Europe needs its own ratings agency. Other SDP stalwarts support that idea. "If the agencies don't understand the way we do things here, our companies will lose out," says Poss. "Their competitiveness will be undermined." Even before the current storm, Finance Minister Hans Eichel was planning to introduce legislation next year to "ensure the reliability of ratings." His staff says that could include a code of conduct for agencies operating in Germany.

And what is it that the ratings agencies don't understand? In the case of Thyssen, the downgrade was triggered by the company's large and growing pension liability. Thyssen executives insist that it is normal for part of the pension liability to be funded out of cash flow, and its failure to set aside enough funds to meet obligations into the future is meaningless. CEO Ekkehard D. Schulz says the company was downgraded even though there had been no deterioration in its situation. "In fact, the opposite is the case," he says. "The facts concerning ThyssenKrupp have not changed."

Torsten Hinrichs, the head of S&P in Germany, notes that decisions about ratings changes are made by five-member panels, and that most of the agency's staff in Europe are Europeans. Moreover, he adds, "we use the same criteria for all our ratings so that they are comparable everywhere." Also, "it is unthinkable that our ratings are influenced by politics." Institutional investors don't see a need for a Europe-only agency.

The damage control squad is already at work. An official from Schr?der's office says no specific legislation is planned that would change the dynamics of the ratings industry. Maybe the controversy will die down. Still, a nerve has been touched. By David Fairlamb in Frankfurt

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