Moody's

Moody’s Corporation (NYSE:MCO) downgrade of Germany’s AAA  rating to ‘negative’ has set the cat among the pigeons. Concerns about the very existence of the Euro zone come to the forefront, as analysts worry about the impact the seemingly endless bailouts for its profligate neighbours would have on Germany, the main source of bankrolling for the aid.

Here are two opposing viewpoints on the downgrade action by Moody’s.

Point.

Christian Schulz, an economist at Berenberg Bank in London, said, “Opposition to additional commitments for rescue measures is likely to strengthen. The downgrade is thus likely worse news for the euro-zone periphery than for the AAA- countries themselves.”

Counter-point.

On the other hand, Otto Fricke, the budget spokesman for Merkel’s Free Democratic coalition partner, said, “Germany can only stay on the top of the heap, if the countries we’re giving aid to conduct economic reforms and make an effort.” Moody’s rating action “is more helpful than harmful because it’s a warning to other European countries that the limits of what Germany can do will be reached eventually,” he added.

Here is a look at what the implications could be for Germany going forward.

Of course Germany’s Finance Ministry has reacted predictably to the downgrade, saying the risks of the Eurozone (the main plank for the downgrade) were nothing new and that it continued to be economically and financially sound. “Germany will, through solid economic and financial policy, defend its ‘safe haven’ status and continue to responsibly maintain its anchor role in the euro zone,” the Berlin-based ministry said. “Together with its partners, it will do everything to overcome the sovereign debt crisis as rapidly as possible.”

However, within Germany, there is rising public opposition to the bailouts. According to this article, taxpayers are fed up with the bailouts spent using their hard-earned money, and would like to draw the hard line for euro zone laggard countries. A poll has showed that a massive 83 percent said Greece should quit the euro zone if it failed to abide to the conditions of its aid package. Can the authorities at Germany continue to ignore this groundswell of opposition to bailouts?

Probably not, and if Germany does not pony up the funds for a Eurozone rescue, the game is, effectively up.

The negative yields on nearer term German bonds are a pointer to the country’s safe haven status. It means people are paying money to keep capital safe in Germany. Are they fools, or very smart?

Probably the latter, when viewed in the context of a Eurozone breakup. This is because the event could unleash a “depression of historical dimensions” and the resultant (fresh) flight of capital to Germany would make the stand-alone German currency (the mark?) extremely strong. Where would that leave German exports? German exports would become uncompetitive overnight with a severe impact on the country’s economy and jobs. In such a fast deteriorating economic situation, Germany would cease to be regarded as a safe haven. This may have a highly adverse impact on its bonds, too.