Germany retained a stable outlook for its top credit rating at Standard & Poor’s just over a week after Moody’s Investors Service warned that the nation’s Aaa grade was at risk.
The long-term debt sovereign rating for Europe’s largest economy was maintained at AAA, S&P said in a statement today.
“In our view, Germany has a highly diversified and competitive economy with a demonstrated ability to absorb large economic and financial shocks,” S&P said. “The outlook on the long-term rating remains stable, reflecting our view that Germany’s public finances and strong external balance sheet will continue to withstand potential financial and economic shocks.”
Germany is the largest contributor to Europe’s bailout packages for Greece and a collapse of that nation’s economy and its possible exit from the euro area may weigh on Chancellor German Angela Merkel’s administration. European Central Bank policy makers will meet today to discuss ways to tackle the region’s debt crisis, which is threatening to cripple Spain and Italy and tear the 17-nation euro area apart.
Moody’s on July 23 lowered the outlook for the Aaa credit ratings of Germany, the Netherlands and Luxembourg to negative, citing “rising uncertainty” over Europe’s debt woes. It left Finland as the only country in the 17-nation euro region with a stable outlook for its top ranking.
Utility of Ratings
Bond-market history indicates that the utility of sovereign ratings may be limited. Almost half the time, yields on government bonds fall when a rating action by S&P and Moody’s suggests they should climb, according to data compiled by Bloomberg on 314 upgrades, downgrades and outlook changes going back as far as the 1970s.
After S&P stripped France and the U.S. of AAA grades, interest rates paid by the countries to finance their deficits dropped rather than rose.
Germany’s bonds have also rallied since the Moody’s release, with yields on two-year notes reaching a record low of negative 0.097 percent this week.
The Moody’s announcement prompted Merkel’s government to say Germany will remain Europe’s haven during the financial crisis and the country remains “in a very sound economic and financial situation.”
S&P projects Germany’s general government debt ratio to remain over 80 percent until 2013, before declining to 77 percent in 2015 as the deficit shrinks.
“Although Germany’s debt is higher than that of some other AAA-rated sovereigns, we believe its diverse and resilient economic structure and cheap access to capital-market funding facilitate a higher debt-bearing capacity than many of its AAA peers,” S&P said today.
A “deepening and prolongation” of the crisis could hit Germany’s economy in other ways, S&P said. While direct exports to Italy, Spain, Portugal, Ireland and Greece were less than 5 percent of German gross domestic product in 2011, the exposure of its financial institutions to strained euro-area economies remains substantial, it said.
German commercial bank claims on Italy, Spain, Portugal, Ireland, Greece and Cyprus totaled 448 billion ($549 billion) euros at the end of March 2012, or 17 percent of GDP, S&P said, citing Bank for International Settlements data.
S&P said it could lower Germany’s rating if the net general government debt ratio reaches 100 percent of GDP, from less than 80 percent of GDP currently.
“This could occur, for example, if consistently larger-than-anticipated deficits surpass 3 percent of GDP, which is well above the constitutional limit,” according to S&P. “An unexpected surge in contingent liabilities could also create downward pressure on the ratings,” it said, adding that it doesn’t expect the scenarios to materialize over the outlook horizon of as long as 24 months.