After the rating agency Moody’s had changed Germany’s AAA ratings outlook to negative on Monday, the German finance ministry commented that its solid economic and financial policy will ensure Germany’s role as an anchor in the euro zone in the future. The ministry added that Moody’s Corporation (NYSE:MCO) outlook stressed short-term risks but disregarded the prospects for stability that were there in the long term.
As a reason for the negative outlook, Moody’s Corporation cited the tremendous potential cost of a euro zone break-up, and the huge amount of money which would have to be paid in order to hold it together. In particular, Moody’s pointed to the liabilities that Germany would incur if it bailed out Italy and Spain, to which the German banking system had “sizable exposures”. Fitch and Standard & Poor’s, the two other top rating firms, still rate Germany AAA with a stable outlook.
Germany has weathered the European debt crisis rather well until now; it even profits from it as investors flee the bond markets of the crisis countries, resulting in interest rates at all-time lows and negative yields for German short-term bonds. Refinancing rates for the private sector have also reached a historical low, stimulating domestic demand and investment. In addition, the depreciation of the euro is giving German exports a boost.
Over the weekend, Germany’s economy minister Philipp Rösler came under fire for publicly revealing his “great skepticism” about Greece’s ability to fulfill the demanding terms of its bailout, which are pre-requirements for further payments. Rösler said that for him personally, a Greek exit of the euro zone had “long lost its horrors”. Critics warned Rösler against making self-fulfilling prophecies and criticized him for putting pressure on Greece to leave the euro. The opposition even argued that Rösler’s “irresponsible comments” might have triggered the change in Moody’s rating outlook.
In Germany, the economic consensus has been that the crisis countries suffer from past sins as they did not have their public finances under control. Accordingly, Germany makes bailout payments dependent on austerity measures, which some critics say could even worsen the situation in the affected countries. Moody’s is creating a catch-22. Germany is downgraded due to potential harm from a Eurozone collapse, however, Germany’s ability to lend money to its neighbors (and lessen the crisis), could be hampered by the rating agency.
Writing for the British Guardian newspaper, German economist Fabian Lindner argues that these measures will limit the countries’ ability to import German goods and to service German debts. If Germany turns out to have shot itself in its own foot, then Moody’s decision will be remembered as the first warning.