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.