Berlin untroubled by ‘negative outlook’ on AAA credit rating


By Ashley Husband-Powton
Credit ratings agency Moody’s has revised the outlook on Germany’s AAA credit rating from ‘stable’ to ‘negative’, the first indication of a potential downgrade in status.
Germany’s central role in the prolonged Eurozone Crisis is at the heart of this reassessment.  Moody’s warned that the highly rated member state was at severe risk from the Europe-wide repercussions of an increasingly likely Greek exit from the Eurozone and the sustained liability to provide support to the shattered Spanish and Italian economies. 

The developing financial crisis saw The Netherlands and Luxembourg – both AAA rated economies – suffer the same fate.

Moody’s clarified the ‘negative’ posting as driven by the view that ‘the level of uncertainty about the outlook for the euro area, and the potential impact of plausible scenarios on member states, are no longer consistent with stable outlooks’.

Germany’s strong and advanced economy, current account surplus, and high debt affordability resulting from high levels of investor confidence were cited as the rationale for the unaltered AAA rating.

However the exit of any country from the European Monetary Union was specified as a likely scenario for a potential downgrading of status, with such an event expected to ‘set off a chain of financial-sector shocks and associated liquidity pressures for sovereigns that would entail very high cost for wealthy countries such as Germany, and cause contingent liabilities from the euro area to increase’.

Despite this, the attitude in Berlin remains one of confidence.  Minister of Finance Wolfgang Schäuble(CDU) dismissed the report from Moody’s as ‘false’ and said that he anticipates no impact on interest rates as a result of the announcement.

In an interview with Germany’s most popular tabloid Das Bild, Schäuble expressed his confidence in both the German economy and the recovery of Spain: “Germany’s strengths are, of course, not endless, but we are still as solid as a rock in Europe”.

Schäuble laid emphasis on the importance of solidarity within the Eurozone, declaring that “the most important thing is that we stabilise our common currency”, and acknowledging the “particular responsibilty” of Germany as the financial haven of Europe.

He went on to state that he had “no doubt” that the Spanish economy would use the financial aid from the Eurozone to establish a “more stable and more resilient” banking system, before pointing out the stark difference between the situations in Greece and Spain: “Spain’s economy is a lot more powerful and is differently structured – the country will soon be back on track”.

Back on the domestic scene, the Minister-President of Bavaria – Germany’s own economic powerhouse – has finally taken off the gloves in the dispute over the contentious system of State Financial Equalisation (LFA) in Germany and announced that his cabinet is to lodge an official complaint with the Federal Constitutional Court.

The constitutionally bound redistribution of revenue under the LFA is intended to create and maintain equal standards of living throughout the Federal Republic despite variations in the financial strengths of the individual Federal States.

With the strongest and largest economy in Germany, Bavaria is by far the greatest contributor to the LFA. In 2011 Bavaria’s input of €3.7 bn accounted for more than half of the €7.3 bn total contribution of all sixteen Federal States.  This trend shows no sign of abating – Bavaria’s liability is predicted to increase to €4.2 billion in 2014. The greatest recipient state in 2011 was Berlin, requiring LFA support of over €3 billion to remain afloat. 

The future of Germany’s AAA credit rating, and the future of the entire Eurozone, ultimately comes down to how long Germany is prepared to be the Bavaria of Europe.