Tuesday, 24 July 2012

Germany Pushes Back After Moody’s Lowers Rating Outlook

By Rainer Buergin - Jul 24, 2012 1:10 PM GMT+0400
Chancellor Angela Merkel’s government said Germany will remain Europe’s haven during the financial crisis, pushing back against Moody’s Investors Service’s decision to lower the outlook on the country’s top credit rating.
The Finance Ministry said the risks in the euro zone are “not new,” and that Germany remains “in a very sound economic and financial situation.” In counterpoint to Moody’s, it cited the verdict of financial markets that have rewarded Germany with record low borrowing costs on government bonds.
German Chancellor Angela Merkel, left, and German Finance Minister Wolfgang Schaeuble during a session of the Bundestag, the lower house of parliament in Berlin on July 19, 2012. Photographer: Johannes Eisele/AFP/Getty Images
July 24 (Bloomberg) -- Steven Saywell, head of foreign-exchange strategy for Europe at BNP Paribas SA, discusses the outlook for the euro, Federal Reserve monetary policy and investment strategy for the U.S., Australian and Canadian dollars. He speaks with Linzie Janis on Bloomberg Television's "Countdown." (Source: Bloomberg)
With "Germany's central position in the euro zone, the idea that it could be somehow isolated from the general deterioration of the euro area is not realistic,” said Nicolas Veron, senior fellow at Bruegel, a Brussels-based research organization. Photographer: Michele Tantussi/Bloomberg
“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 ministry said in an e-mailed statement. “Together with its partners, it will do everything to overcome the sovereign debt crisis as rapidly as possible.”
Euro-area bonds fell today after Moody’s lowered the outlook to negative for the Aaa credit ratings of Europe’s biggest economy, the Netherlands and Luxembourg, citing “rising uncertainty” over Europe’s debt crisis. Finland was the only country in the 17-nation euro to keep a stable outlook for its top ranking, as Moody’s cited its limited exposure to the region in trade terms along with a lack of debt and a small and domestically oriented banking system.

Yields Rise

German 10-year government bond yields advanced 8 basis points, or 0.08 percentage point, to 1.25 percent at 10:15 a.m. Berlin time. Dutch 10-year bonds also fell, with the yield climbing 10 basis points to 1.72 percent.
Spanish 10-year yields rose to a euro-era record of 7.569 percent as Economy Minister Luis de Guindos prepared to meet with German Finance Minister Wolfgang Schaeuble in Berlin later today. No press conference is planned.
Germany was left the only euro country with a stable AAA rank at Standard & Poor’s after the rating company downgraded nine euro states on Jan. 13.
“In all large industrialized countries, AAA is an endangered species,” Commerzbank AG Chief Economist Joerg Kraemersaid today on Deutschlandfunk public radio. “They’re all under fire.”
Luxembourg’s Jean-Claude Juncker, who leads the group of euro-area finance ministers, said Germany, the Netherlands and Luxembourg continue to enjoy “sound fundamentals.”

‘Strong Commitment’

“Against this background, we reiterate our strong commitment to ensure the stability of the euro area as a whole,” Juncker said today in an e-mailed statement.
In its statement, Moody’s said that risks that Greece may leave the euro and an “increasing likelihood” of collective support for European countries such as Spain and Italy were among reasons for the change.
“Given the greater ability to absorb the costs associated with this support, this burden will likely fall most heavily on more highly rated member states if the euro area is to be preserved in its current form,” Moody’s said.
German government debt has benefited as investors seek safety during the financial crisis that emerged in Greece in late 2009. Germany’s 10-year yield matched its June 1 record low of 1.127 percent yesterday, while the two-year note yield was at minus 0.045 percent.

Short-Term Focus

Schaeuble’s ministry said that Moody’s is focusing on short-term risks while failing to mention longer-term prospects of stabilization. “The euro zone has undertaken a whole range of measures that will lead to a lasting stabilization of the euro zone,” the ministry said.
The Netherlands never comments on rating agencies, Niels Redeker, a spokesman of the Dutch Finance Ministry, said in a text message.
The euro was little change at $1.2113. The Stoxx Europe 600 Index dropped 0.3 percent to 251.13, while Standard & Poor’s 500 Index futures expiring in September fell 0.3 percent.
Europe was plunged into fresh market turmoil yesterday as the first call for bailout aid by a Spanish region sent borrowing costs surging, while Spain and Italy reinstated a ban on betting on stock declines. Equities slumped for a third day in Asian trading, with haven demand forAustralia’s government bonds sending yields on its 15-year securities to a record low.

German Isolation

With “Germany’s central position in the euro zone, the idea that it could be somehow isolated from the general deterioration of the euro area is not realistic,” said Nicolas Veron, senior fellow at Bruegel, a Brussels-based research organization. “From this standpoint, the downgrade sounds logical.”
Almost half the time, yields on government bonds fall when a rating action by Standard & Poor’s and Moody’s suggests they should climb, according to data compiled by Bloomberg on 314 upgrades, downgrades and outlook changes going back as far as the 1970s.
After S&P stripped France and the U.S. of AAA grades, interest rates paid by the countries to finance their deficits dropped rather than rose. The U.S. 10-year Treasury yield yesterday fell as low as a record 1.3960 percent. That compares with an average of 3.76 percent over the past 10 years, according to data compiled by Bloomberg.
To contact the reporter on this story: Rainer Buergin in Berlin at rbuergin1@bloomberg.net
To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net