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Germany’s triple-A rating under threat

The Local · 27 Sep 2011, 12:12

Published: 27 Sep 2011 12:12 GMT+02:00

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European leaders are currently debating whether to increase the European Financial Stability Facility (EFSF) to over a trillion euros, so that it would be in a position to bail out major eurozone economies like Spain or Italy in an ermergency. Other suggestions include using the European Central Bank (ECB) to back the EFSF or integrating European financial policy more closely.

Closer cooperation would certainly help highly indebted countries like Greece, but it could also raise credit costs in richer countries like Germany and France.

The German parliament is due to vote on putting more cash into the EFSF on Thursday.

In July,Merkel agreed with other eurozone heads of state to increase the fund from €250 billion to €440 billion, while state guarantees are to rise from €440 billion to €780 billion. If the vote is passed, Germany’s contribution will increase from €123 billion to €211 billion.

The EFSF is also to be given the power to buy up government bonds from states in crisis, currently a function of the ECB.

David Beers, expert in assessing country ratings at Standard & Poor’s, told the Reuters news agency, "We're getting to a point where the guarantee approach of the sort that the EFSF highlights is running out of road."

"There is some recognition in the eurozone that there is no cheap, risk-free leveraging options for the EFSF any more," Beers added.

Frank Engels, an economist at Barclays Capital, said that even if lawmakers pass the bill "by a very healthy majority," growing disunity between Merkel's Christian Democrats and her coalition partners the Free Democratic Party signalled trouble ahead.

"German politics is likely to become even more volatile than before in the wake of the growing divergence between the FDP and the Conservatives on matters related to EMU (monetary union)," he said.

In a test vote on Tuesday, 11 Christian Democrat MPs voted against the bill, with two abstentions. Merkel's coalition government has a 40-seat majority in the Bundestag over the opposition.

Speaking at the Federation of German Industry (BDI) in Berlin on Tuesday, Greek Prime Minister Giorgos Papandreou promised that Athens would meet all of its obligations.

Story continues below…

"Yes, we can," Papandreou said, echoing the famous rallying cry of US presidential candidate Barack Obama in 2008. "We are not a poor country, we were a poorly managed country." The prime minister called on Europe to use the current crisis to become a “stronger."

Germany and the European Commission have meanwhile increased the pressure on Greece to cut costs again.

DAPD/DPA/AFP/The Local/bk

The Local (news@thelocal.de)

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Your comments about this article

12:58 September 27, 2011 by Englishted
Who the hell are these firms to tell a sovereign country's democratically elected government what it can and can't do.With the threat of blackmail in the form of downgrading.I'm no fan of the leaders we have now but at least we can vote them out ,what can we do to these firms.
13:07 September 27, 2011 by flipinwotsit
I don´t know. Maybe I´m just a stupid Busdriver but I hear everyday that there is no money for pensions, no money for new roads, no money for health and people are working all hours for low wages just to make ends meet...and yet, here is the chancelor throwing billions and billions into foreign countries ( lost causes) and the people don´t stand up and say " hey enough is enough. pump our hard earned taxes back into the country or else"....
13:47 September 27, 2011 by auniquecorn
and that is the flipin truth.
14:01 September 27, 2011 by aceroni
It's either throwing billions in foreign countries and leaving everything as it is at the moment, or into bankrupted german banks after these countries will default on their debts and risk the dissolution of the european union. Your call
14:14 September 27, 2011 by jg.
Englishted "Who the hell are these firms to tell a sovereign country's democratically elected government..."

Of course, the answer is that these firms cannot order anyone to do anything. The credit ratings companies are paid for their analysis by market investors, who are keen to have advice that has not come from a government source and which might have been adjusted for some political purpose.

If governments did not spend beyond their means, they would not need to borrow from the markets and would not have to worry about their credit ratings.

The snag with the EFSF is that, whilst they may have the promise of over a trillion dollars to the fund, the countries making the promises are themselves, already in debt : nobody in the EFSF actually has the money. Maybe the plan is to just print more Euros and inflate away the debts - but I am not sure Germany is ready to re-visit the 1920s.
14:31 September 27, 2011 by freechoice
those firms and many others are headed by financial scumbags who were responsible for the events leading to 2008 global financial collapse and the lost of millions of jobs worldwide. watch Inside Job by Charles Ferguson.
14:32 September 27, 2011 by ChrisRea
Pretty shameless from S&P, isn't it? "There is some recognition in the euro zone that there is no cheap, risk-free leveraging options for the EFSF any more" - S&P has the guts to say that after they triggered the financial crises by overrating mortgage-backed securities months after the housing market started to collapse?

So let's see again what's happening: Germany refuses the shady idea of Eurobonds (they would be similar to the similar to the hollow and nice packed securities that S&P overrated) and opts for covering financial needs of Eurozone members with financial resources within the Union, S&P foresees lost business for themselves as they intended to rate the Eurobonds as junk and then they try to slam Germany by threatening to downgrade. It seems to me like a desperate try to blackmail.
14:40 September 27, 2011 by MonkeyMania
Now ain't that a thing? Damned if you do and damned if you don't. I guess that is what being part of a community is all about.
15:26 September 27, 2011 by venkyfra
well timed... nice warning indeed...

throwing money into EFSF and hoping to retain AAA rating is like wanting to have sex and yet hoping to remain virgin...
15:59 September 27, 2011 by catjones
Blackmail? Really? How would you rate DL after pouring a trillion into the black hole? Accounting 101.
16:34 September 27, 2011 by derExDeutsche
Inside Job? Is that where 'financial scumbags' create €24,904 of Federal Debt for every Citizen in Germany? lol. those are some mental gymnastics. isn't there a Zeitgeist screening somewhere for you to attend?

with 8.4 Mil people, the German Citizenry currently owes € 206,000,000,000.- in federally created debt. no middle man required.

'The federal government is responsible for the biggest share of the burden, with the average federal debt per citizen totalling €16,048, a 25.5 percent increase over 2009. '
20:01 September 27, 2011 by Lachner
I think that the guidance and credibility of rating firms like S&P, Moody's and Fitch is absolutely rubbish. These firms where the ones responsible for giving AAA rating to all the COD's full of toxic sub-prime mortgages that were sold to investors all over the world and caused the 2008 financial crisis. These rating agencies also gave AIG, Fannie Mae, Freddie Mac, Lehman Brothers and Bear Stearns A2 to AAA ratings only days before they went bankrupt or were bailed by the US Government.

Therefore, I could care less what S&P, Moody's or Fitch can say right now about anything. They are just part of the global financial greed game played by politicians, bankers, academics and lenders.
23:56 September 27, 2011 by derExDeutsche
@ Lachner

'AIG, Fannie Mae, Freddie Mac, Lehman Brothers and Bear Stearns A2 to AAA ratings only days before they went bankrupt or were bailed by the US Government.'

Sir, Fannie Mae and Freddie Mac = USA Govt, not a private entity or bank. Fannie Mae stands for 'Federal National Mortgage Association' . They are who guaranteed the loans, that private banks would have never given out on their own volition. When loans to people with bad credit 'went bad', as the private banks suspected they would; it was OK because they were guaranteed by the US Govt. and Taxpayers in the form Policy, Fannie Mae and Freddie Mac.

Politicians, in the USA, decided it was their job to boost home ownership and in turn the real estate market, builders, big box, ect., in effect creating high demand, a housing bubble. However, when the people with bad credit, did what people with bad credit do; default, it is the private banks fault? The banks knew that people with bad credit do not always pay back their loans, but the banks were FORCED by Law to offer out these loans that became toxic.

00:25 September 28, 2011 by Deutschguy
derexdeutsche is not correct.

The private banks were never "forced" to make loans. They chose to participate in programs to get the service fees and then to resell the loans. In other words, they manipulated and fudged data stipulating that a home buyer was credit worthy, and they did not care if the loan went bad, because they knew they would not be responsible for it anymore.

No forcing involved to issue bad loans. None. They might have believed the implied guarantee that Fannie Mae and Freddie Mac was a permanent market for their loans, but no law "forced" them to participate.

exdeutsche's post and link leave out the fact that the great majority of sub-prime loans were issued by private lenders. The CDOs and CDSs were all inventions of the private market, not government.

Blaming "government" is the private banks way of deflecting responsibility, and to fight off any new attempts to regulate them. It was their decades long lobbying efforts that weakened the regs to begin with, that allowed the credit crisis to happen.
09:04 September 28, 2011 by heyheyhey

re." but the banks were FORCED by Law to offer out these loans that became toxic."

YOU are VERY mistaken. The bad loans were written because there was NO REGULATION of these greedy bankers anymore, AND because every loan or refinance put alot of $$$$$$ in the pockets of all those involved in selling the loan.

10:47 September 28, 2011 by Lachner
@derExDeutsche - so according to you the banks were FORCED by law to offer out these loans that later became toxic and it was all the government's fault? That is just rubbish. The banks knew exactly what they were doing and they got away with it mainly because of the complicity of shady politicians like Alan Greenspan, Ben Bernanke, Larry Williams, George W. Bush and Hank Paulson. Nonetheless, the private banks were not the only ones at fault, since mortgage lenders, insurance companies, Wall Street brokers and even American home buyers all share a piece of the blame pie.

The financial collapse began when private banks began to approve mortgages, repackage them all onto these fancy synthetic CDOs and then sell them to investors as "low risk investments with high returns" and all with a triple A rating awarded by a fancy rating agency. Once the banks offloaded the risk of the approved mortgages to the investors, they then proceeded to approve as many loans as possible in order to increase their profits and pushed brokers to give out more loans as possible. That's when all hell broke loose. They would give out loans to people with no income, no jobs and no assets to boost profits, so it was just a matter of time before it all went off. To me, it all looked like a well designed "Ponzi Scheme" elaborated by Wall Street with the complicity of the Bush Administration.
11:39 September 28, 2011 by ChrisRea
@ catjones #10

First of all, EFSF is far from being a black hole. It worked just fine and helped the European economies. Germany is continuing to support it exactly because it helps its economy (it is definitely not just for the good of society).

Secondly, ratings are meant to reflect the capacity of producing added value and cashing it, so that loans can be reimbursed. If I can put aside cash without affecting the reimbursement plans (like Germany did) and I am still generating money (as the German economy does), there is no rational ground to downgrade. This why S&P also refuses to reveal its rating process, as it is very questionable (it is well-known that they make calculation errors in the range of $2 trillion - yes, trillion -, but then refuse to revise their computations). With a "pay to play" model (companies pay S&P in order to be rated), it is not a wonder that their ratings are not based on sound calculations, but on profit search. This conflict of interest is learned in Audit 101.

@ derExDeutsche #13

"Fannie Mae and Freddie Mac = USA Govt, not a private entity or bank. Fannie Mae stands for 'Federal National Mortgage Association' "

While Fannie Mae is a GSE (government-sponsored enterprise), which means that they were created by created by the United States Congress, it has been a publicly traded company since 1968 (that means with private shareholders. So in no way you can say that is the same body as the US government.

Fannie Mae acted greedy due to the pressure of its shareholders (again, we are talking about private shareholders). S&P, because of their own greed, supported them with ratings until it was too late. So this time it was not the politicians' fault (if we would not consider that they should regulate better the system, including the rating agencies).
11:52 September 28, 2011 by storymann
S&P, these are the brilliant folks that gave Lehman Bros, AIG, Sacs and other institutions A ratings just prior to the 2008 meltdown.
15:49 September 28, 2011 by catjones
There was not a single innocent participant in the meltdown...from the world's governments, to the banks, to the rating institutions, to the consumers who gamed the speculation. Everyone, everyone knew the value of a house could not continue to go up over and over again, but few people knew when to get off the ride. Everyone prospered (Everyone) and now everyone suffered.

Want immunity to the vagaries of life? Move to Mars and get off my planet.
17:42 September 28, 2011 by derExDeutsche
@ DeutscheGuy

'In other words, they manipulated and fudged data stipulating that a home buyer was credit worthy, and they did not care if the loan went bad, because they knew they would not be responsible for it anymore.'

How can you fudge data for a system whose purpose it was to give loans to people with bad credit? Fannie Mae is a Govt. subsidized bank. WHich is used to make Policy.

How HUD Mortgage Policy Fed the Crisis


'Fannie Mae Eases Credit To Aid Mortgage Lending' from 1999, oh that G. W. Bush ...


@Lachner: 'Bush's Fault' ? LOL
18:07 September 28, 2011 by Deutschguy
@exdeutsche: "for a system whose purpose it was to give loans to people with bad credit?"

Not an entire system. There were programs, all voluntary, that banks participated in whose purpose was to increase home ownership. No doubt. However, nowhere in any legislation did it say to give out loans to buyers with "bad credit".

And, before you let the Bush administration off the hook, you might look up Bush's "Ownership Society" programs, which make the Clinton admins' programs pale in comparison.

Again, the Cheney admin was perfectly happy to let Chris Cox (a GOPer) at the SEC look the other way, while all these squirrely 'investment vehicles' were invented by Wall Street firms, as S&P and the other ratings agencies sold a fake AAA product to those who would pay the fees.

Whenever you hear the phrase "shrink government", what it really means is weaken regulation and understaff regulating agencies, so that private firms can do whatever they want. That includes breaking the law, jeopardizing entire economies and banking systems, and paying insiders huge bonuses to collect fees and profits, no matter if it hurts middle and lower income families by the millions.

Whatever oversight wasn't there was due to influence peddlers (lobbyists) hired by the private sector to weaken regs and strip government of power to adhere to reasonable lending standards and to not selling products that were flawed and dangerous to begin with.
01:33 October 1, 2011 by mkvgtired

"Who the hell are these firms to tell a sovereign country's democratically elected government what it can and can't do....what can we do to these firms. "

Just dont listen to them. No one is legally forced to listen to their ratings. Germany can employ its own raters to rate the quality of the PIIGS debt that the EFSF will be taking on. Not one of those raters with the mental ability over a 3rd grader would say the debt isn't crap. Germany is basically transferring the PIIGS below AAA debt onto its balance sheet via the EFSF, therefore taking on much less creditworthy debt.

No one is forcing anyone to listen to them, the fact is they make a good point. If you are a AAA country and take on €1 trillion in junk debt, then there is a good chance you will be downgraded.

Its like a guy telling you investing €10,000 into Zimbabwe Dollars in 2006 is a bad idea, then when you lose all your money calling him an idiot.

@ those commenting on exDeutch,

To a certain extent they were forced. I worked in banking. We had to make a certain percentage of loans to low income people
09:54 October 1, 2011 by heyheyhey
Fact is........we are all screwed.

When this sh!t heap finally collapses, we all go down the sewer.

Yeah, good old greedy b@st@rd American capitalists who sold their version of making money to the whole world. Rambo capitalism...............

The next time the US tries to sell the world on one of its ideas we had best all run the other direction.
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