– Egan Jones Downgrades Germany From AA To AA- (ZeroHedge, Jan. 18, 2012):
Sean Egan strikes again, this time downgrading Germany from AA to AA-.
Germany maintains its position as the European Union’s top economy. However, Germany has been shouldering the burdens of other EU countries via its exposure to the EFSF and indirectly via the ECB’s hefty exposure to the weaker banks and the weaker sovereign credits. The country’s debt to GDP of 83% as of 2010 (expect near 86% for 2011) and a deficit to GDP of 4.6% is weak (and getting weaker) for a top-tier country. On the positive side, unemployment was only 6.8% but will probably increase as many EU countries implement austerity measures. Other positives were the positive (EUR133B) balance of trade and the positive (EUR193B) current account as of the end of 2010. Inflation has been fairly moderate at 2%, but we expect an increase as a result of the decline in the euro relative to the dollar.
German chancellor Angela Merkel continues to create tension with EU member states by pushing for ratification of changes to the Lisbon Treaty. The government insists that private investors bear more of the costs of further European bailouts. Note, the cost of the bailouts is likely to be absorbed via increased support for the EFSF, the ESM, the ECB and a rise in the number of euros. The fallout from a likely Greek default needs to be monitored.
– Time To Cut Germany’s Credit Rating? Egan-Jones Downgrades To AA- (Forbes, Jan. 18, 2012):
Prone to controversial actions, ratings agency Egan-Jones axed Germany’s sovereign rating from AA to AA- and kept it on negative credit watch. While remaining the Eurozone’s strongest economy, German tax payers will be footing a significant portion of the bill for the different bailout mechanisms in place, from the EFSF to the ECB and even the IMF’s funding facilities.
Speaking with Forbes, Egan-Jones co-founder Sean Egan said “[Germany’s] credit quality has slipped and its debt-to-GDP ratio is increasing.” In the report, the analysts noted the Eurozone’s top dog has debt exceeding €2 trillion ($2.6 trillion) and cash of about €235 billion ($301 billion). Debt-to-GDP levels hit 83% in 2010, will probably hit 92% in 2011 and could reach 116.7% by 2013.
“Germany does benefit from flight to quality flows,” explained Egan, adding that mathematics doesn’t lie, and eventually, someone will have to pay the bill. “The major positive German has realized over the past year has been the significant decline in its funding costs, […] the two-year debt yield has declined from 2% to near 0 while the 10-year has declined from above 3% to below 2%,” read the report.
Regardless, rising fiscal deficits (which have moved north of 4% of GDP) and falling economic growth across the Eurozone, Germany’s major trading partner, will hamper the country’s ability to maintain growth at around 4% (as it did in Q4 2011).
“There is a tension between austerity and stimulus,” explained Egan, “and it’s an interesting debate, but it becomes [meaningless] when debt-to-GDP ratios go above 90%.” Egan was referencing the famous Reinhart and Rogoff argument made in “This Time It’s Different,” where the economists argue debt-to-GDP ratios north of 90% become an actual drag on economic growth given financing costs and loss of credibility.
Egan felt Germany’s, and the Eurozone’s, problems have deeper causes. “All of the developed world, by which I mean Japan, the U.S., and Europe, are facing the same problems,” explained Egan, noting that the baby boomer generation was going entering less productive stages of life and therefore taking more out of the economy than they were putting in. Thus, the crisis boils down to declining productivity.
The credit rating agency, which anticipated Standard & Poor’s downgrade of the U.S. economy, has gained prominence through its controversial rating actions. The company sounded the alarm bell on Lehman Brothers, AIG, MBIA, and MFGlobal before others. Its downgrade of Jefferies forced the broker-dealer to publicly disclose its European exposure to get investors off their backs as the stock tanked.
While Jefferies has recovered, to a certain extent, Egan-Jones’ German downgrade could be a foreshadowing of how the European sovereign debt crisis unfolds. Oh yeah, and S&P already cut France.