S&P: More bailouts will lead to Germany’s eventual downgrade
I mentioned last week that Tony Stringer, a Managing Director at Fitch, the ratings agency, told Reuters that a larger bondholder haircut equals a better Greek rating. The logic is simple: a country which has a reduced debt load is better able to meet its debt obligations, and, therefore deserves a higher credit rating. In this case a Greek default would reduce Greece’s debt burden and could mean its ability to service debt in the future without another default is greater.
Obviously, I am not talking about willingness to pay, “the Ecuador question” which plagues the US, but rather ability to pay.
But what if the Greeks continue to get bailed out, what then? An Austrian newspaper has some thoughts on this regarding the politically sensitive issue of increasing the EFSF, the European bailout fund, via S&P:
A strengthening of the euro rescue package could lead to euro-zone countries being targeted by Standard & Poor’s, the ratings agency advised. The sundry alternatives for reforming the EFSF bailout facility could affect credit ratings, S&P expert David Beers said on Sunday. This could also be the case with Germany and France. On Thursday, the German Parliament will decide whether to increase credit guarantees of the EFSF. S & P expert Beers warned Germany not to overestimate its own economic strength.
–EFSF-Aufstockung könnte Länderratings belasten, Der Standard
This is something that Claus Vistesen had already brought to our attention last year.
So, Can Germany Pay?
On that note, I thought that I would highlight an issue which has yet to be debated much in the context of the Eurozone debt crisis. In this sense, we always hear about CDS or yield spreads to Germany and, still, to the extent that we are talking "EU money", we know that it is the German taxpayer who must foot the majority of the bill.
So, can Germany really pay all this?
The recent economic narrative on Germany suggests that it can. In fact, Germany has been hailed as the rock to which all other shipwrecked European economies must turn in their hour of need, with Germany’s GDP growth rates in Q2 and Q3 (2010) exceeding expectations…
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The question which seems to whisper in the wind (and which may turn into a roar sooner rather than later) is just how Germany is going to be able to shoulder all those bailouts when the real bailout it needs to think of is the one of its own welfare state, as the weight of population ageing sets in. Of course, Germany could, in principle, sacrifice any build up of assets in Asia, Latin America and the rest of the emerging world and devote its entire surplus powers to financing excess investment and consumption in the Eurozone periphery and Eastern Europe ad infinitum. But somehow, this does not strike me as a viable long term solution since this has already been tried – and well, it got us into this mess in the first place.
–Germany is Old Too, November 2010
Germany’s ability and willingness to pay will decrease as the economy falters. Remember, Germany is more indebted than Spain and has also long been in violation the Maastricht Treaty’s stability and growth pact provision on government debt to GDP. Germany is not a ‘paragon of fiscal probity’ nor is it a “rock to which all other shipwrecked European economies must turn in their hour of need”. It is has done well. But Germany is also a country that is aging and, hence, dependent on exports for economic growth. Germany too has limited resources. And this is important to note since Germany as a currency user can also be pulled into the sovereign debt crisis.
These analysts are very excitable. Doesnt Greece account for 2% of the GDP Euro zone? Germany bailing out Greece is akin to Germany bailing out one of its smallest provinces… say Saxony. If Saxony had debt problems I doubt very much Fitch would pay much attention to it.
It will be the bail out of its banks who do have significant debt problems that will be the undoing of Germany. Longer term the problem is bailing out insolvent banks without draconian reforms.
Granted, in theory, Germany as a currency user can face solvency issues. However, we need to keep in mind that the Eurozone as a whole is solvent. Each and any individual state could go down that debt overhang path, but if a significant majority does it, the response at the “federal” level will be monetary easing which will ease the burden for all states. We are already at that point, with France (or rather French banks) having been in the eye of the storm last week, and now Germany?
I was reading some “analysis” the other day claiming that the whole world is indebted and the endgame is global default. The US, the Eurozone, Japan, the UK, they all have unsustainable debts and the natural end result is they will all default. Huh? Really? To whom? To aliens?
While the EU as a whole is solvent the banks are not. The French and some big German banks are insolvent. What really needs to be considered is that bailing out insolvent banks has impaled the euro taxpayer on a debt hook. That is what has decimated Ireland. The fact that Iceland did not bail out its banks is what has save it as a sovereign. The UK bail out of some of its banks could result in a UK default. The US also has to avoid taking bailing out its banks. World wide there is far too much debt and debt write-downs are essential, though that will either mean protracted falls in lending or a fast write-down. A fast write down will wipe out the banks so politicians are wanting a Japanese solution to allow the banks to make their profits at the expense of society and for those excess profits to bail out the banks. The problem is that society pays far more that way because it is more likely to be called on bailing out the banks on top of the higher bank profits. It also imposes a “bank tax” on industry and commerce to help fund the banks deficits. The advantage for politicians is that it kicks the can down the road.
Germany is not really a currency user. Its bonds are implicitly backed by the ECB, either because Germany controls the ECB, or because Germany is too big to fail – take your pick.
You can make the argument that Germany has an implicit ECB backstop. I think it has merit. But that doesn’t change the fact that the German federal government does not create euros. Germany is a currency user.