Germany Pushes Back After Moody’s Lowers Rating OutlookRainer Buergin
Chancellor Angela Merkel’s government said Germany will remain Europe’s haven during the financial crisis, pushing back against Moody’s Investors Service’s decision to lower the outlook on the country’s top credit rating.
The risks in the euro zone are “not new” and Germany remains “in a very sound economic and financial situation,” the Finance Ministry said. In counterpoint to Moody’s, it cited the verdict of financial markets that have rewarded Germany with record low borrowing costs.
“Germany will, through solid economic and financial policy, defend its ‘safe haven’ status and continue to responsibly maintain its anchor role in the euro zone,” the Berlin-based ministry said in an e-mailed statement. “Together with its partners, it will do everything to overcome the sovereign debt crisis as rapidly as possible.”
Euro-area bonds fell today after Moody’s lowered the outlook to negative for the Aaa credit ratings of Germany, the Netherlands and Luxembourg. Moody’s cited “rising uncertainty” over Europe’s debt crisis. It left Finland as the only country in the 17-nation euro region with a stable outlook for its top ranking.
German 10-year government bond yields advanced 6 basis points to 1.23 percent at 12:22 p.m. Berlin time, while equivalent Dutch yields climbed 8 basis points to 1.70 percent. Credit-default swaps on Germany were little changed at 83 basis points, the highest since July 13, according to Bloomberg data.
Spanish 10-year yields rose to a euro-era record of 7.569 percent before falling back to 7.53 percent as Economy Minister Luis de Guindos prepared to meet with German Finance Minister Wolfgang Schaeuble in Berlin later today. No press conference is planned.
Germany, as Europe’s biggest economy and the dominant nation in almost three years of crisis fighting, is under pressure to do more to stem the turmoil as borrowing costs rise in Italy and Spain and Greece strives to identify yet more budget cuts to satisfy the terms of its international bailout.
Moody’s said risks Greece may leave the euro and an “increasing likelihood” of collective support for countries such as Spain and Italy were among the reasons for its decision.
“Given the greater ability to absorb the costs associated with this support, this burden will likely fall most heavily on more highly rated member states if the euro area is to be preserved in its current form,” Moody’s said.
Luxembourg’s Jean-Claude Juncker, who leads the group of euro-area finance ministers, said that Germany, the Netherlands and Luxembourg continue to enjoy “sound fundamentals.” He reiterated a “strong commitment to ensure the stability of the euro area as a whole,” according to an e-mailed statement.
The Netherlands never comments on rating companies, Niels Redeker, a spokesman of the Dutch Finance Ministry, said in a text message.
German government debt has benefited as investors seek safety during the financial crisis that emerged in Greece in late 2009. Germany’s 10-year yield matched its June 1 record low of 1.127 percent yesterday, while the two-year note yield was at minus 0.045 percent, meaning that investors holding the debt to maturity will receive less than they paid for it.
“If even Germany loses the highest rating, then the second-highest rating becomes the best one,” Norbert Barthle, the budget spokesman in parliament for Merkel’s Christian Democratic bloc, said in an interview. “All the agencies do is compare. It’s not that worrying.”
All the same, “it can’t be ruled out” that the downgrade will damp lawmaker appetite to approve aid for cash-strapped euro members, he said.
While the flight to safety means Germany’s cost of borrowing is unlikely to rise, the Moody’s outlook change may curtail Merkel’s crisis-fighting strategy, said Christian Schulz, an economist at Berenberg Bank in London.
“Opposition to additional commitments for rescue measures is likely to strengthen,” Schulz said. “The downgrade is thus likely worse news for the euro-zone periphery than for the Aaa-countries themselves.”
Almost half the time, yields on government bonds fall when a rating action by Standard & Poor’s 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. The U.S. 10-year Treasury yield yesterday fell as low as a record 1.3960 percent. That compares with an average of 3.76 percent over the past 10 years, according to data compiled by Bloomberg.
“In all large industrialized countries, AAA is an endangered species,” Commerzbank AG Chief Economist Joerg Kraemer said today on Deutschlandfunk public radio. “They’re all under fire.”
Fitch Ratings issued its first rating for Germany in August 1994 and it was AAA, Christian Giesen, a spokesman for Fitch in Frankfurt, said today. Outlooks have been around since 2000 and Germany’s has always been stable, he said.
S&P has had a AAA stable rating on Germany since August 1983, with the exception of Dec. 5, 2011, to Jan. 13, 2012, when Germany was among a group of euro states put on credit watch. S&P declined to comment on whether it will follow Moody’s.
In January, when S&P downgraded nine euro states, leaving Germany as the only euro country with a stable AAA rating, Merkel said the decision “confirms my conviction” that austerity is needed.
Moody’s “shines the spotlight” on an important premise for all euro rescues, Otto Fricke, the budget spokesman for Merkel’s Free Democratic coalition partner, said in an interview.
“Germany can only stay on the top of the heap if the countries we’re giving aid to conduct economic reforms and make an effort,” he said. Moody’s rating action “is more helpful than harmful because it’s a warning to other European countries that the limits of what Germany can do will be reached eventually.”
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