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Euro zone worries cast rating cloud on Germany

Source : BUSINESS_STANDARD
Last Updated: Tue, Jul 24, 2012 19:11 hrs

Germany’s stellar credit rating has been thrown into doubt because of the cost of holding together the Euro zone, potentially making it more difficult for Chancellor Angela Merkel to muster political support to aid Greece and Spain.

Moody’s Investors Service said late Monday that it was changing the outlook on Germany, as well as on the Netherlands and Luxembourg, to “negative,” citing what it said was an increased risk that those countries will have to bear the cost of propping up Spain and Italy.

That helped push up borrowing costs Tuesday for both Germany and Spain ahead of talks late in the day between the finance ministers of both countries in Berlin.

While Germany’s bond yields remain near record lows, Spain’s have reached levels that are considered unsustainable for long, raising fears that it will have to ask for aid that its European partners cannot afford.

Spanish leaders have pleaded with the European Central Bank to intervene in the bond market to take off some of the pressure. But the ECB said on Monday it did not buy any government bonds last week, disappointing hopes it might reactivate a dormant debt-purchasing programme.

The Spanish government could also try to persuade its Euro zone partners to allow the bloc’s bailout fund to buy up Spanish debt, but that would also mean accepting the stigma of more intrusive “conditionality.”

“This instrument can be used on the request of a member state and there has been no request from a member state to use it,” a European Commission spokeman, Antoine Columbani, told reporters in Brussels when asked whether such a move was under consideration.

In changing its outlook for Germany, the credit rating agency also cited what it said was a greater danger that Greece will leave the euro and “set off a chain of financial-sector shocks and associated liquidity pressures for sovereigns and banks that policymakers could only contain at a very high cost.”

The change is less drastic than a ratings downgrade, limiting its effect on the three countries’ borrowing costs. Even with the upward bump Tuesday, German bond yields remained around 1.24 per cent, well below the rate of inflation, because investors regard the country as a haven from Euro zone turmoil. On the secondary market, Spanish 10-year yields remained above a dizzying 7.5 per cent Tuesday.

The Treasury in Madrid reported it sold euro 3.05 billion of short-term bills, more than the euro 3 billion sought. But the yield for three-month bills rose to 2.43 per cent from the 2.36 per cent it paid last time, on June 26. Six-month bills rose to 3.69 per cent from 3.24 per cent last month.

Analysts said a bond auction set for August 2 would be a tougher test for Madrid.

Jean-Claude Juncker, president of the Eurogroup of countries in the Euro zone, sought to allay such doubts, saying in a statement Tuesday: “We reiterate our strong commitment to ensure the stability of the euro area as a whole.”

Juncker portrayed the Moody’s action as an affirmation of the financial strength of the Euro zone countries. While warning about ratings for Germany, the Netherlands and Luxembourg, Moody’s reaffirmed its stable outlook for Finland, citing the country’s extremely low debt.

The Moody’s statement highlighted the nearly impossible dilemma confronting Euro zone leaders.

They face criticism for failing to address the euro crisis more decisively — what Moody’s referred to as a “reactive and gradualist policy response” to the crisis.

Paul Geitner in Brussels and Raphael Minder in Madrid contributed reporting

Mario Draghi, the president of the ECB, appears ready to take further action only if there are signs that Euro zone troubles could lead to deflation, a ruinous decline in prices that is associated with severe economic downturn. “Our mandate is to maintain price stability in order to prevent both higher inflation and a generalised, broadly based fall in prices,” Draghi told the French newspaper Le Monde last week. “If we see such risks of deflation, we will act.”

With Germany’s prized AAA credit rating under threat, Merkel could face even more trouble getting members of her own party, the Christian Democrats, to support measures to prevent a disintegration of the Euro zone. Last week Merkel struggled to rally a majority of her own governing coalition to support a program to rescue ailing Spanish banks.

It has become increasingly clear that there is no political support in Germany for giving any more money to Greece than has already been promised. The Moody’s action will only strengthen the hands of dissenters in Parliament who believe Greece should leave the euro. Skepticism about further aid to Greece is also high in the Netherlands, which is holding general elections in September.

Harald Benink, a professor of banking and finance at Tilburg University in the Netherlands, said the new threat to the country’s credit rating could bolster support for euro-skeptic politicians. “The populist parties, on the extreme and left — this is only reinforcing their perspective,” he said.

Benink said that leaders were underestimating the destructive consequences if Greece left the euro. It would no longer be a given that Euro zone countries are irrevocably linked, he said. “Once Greece exits, the fundamental promise of the Euro zone is broken,” Benink said.

The Moody’s statement highlighted the nearly impossible dilemma confronting Euro zone leaders. They face criticism for failing to address the euro crisis more decisively — what Moody’s referred to as a “reactive and gradualist policy response” to the crisis. But a more forceful policy response would probably require greater financial commitment, throwing the financial strength of the Euro zone’s wealthiest countries under a darker shadow.

Jean-Claude Juncker, president of the Eurogroup of countries in the Euro zone, sought to allay such doubts, saying in a statement Tuesday: “We reiterate our strong commitment to ensure the stability of the euro area as a whole.”

Juncker portrayed the Moody’s action as an affirmation of the financial strength of the Euro zone countries. While warning about ratings for Germany, the Netherlands and Luxembourg, Moody’s reaffirmed its stable outlook for Finland, citing the country’s extremely low debt.

The resolve of Euro zone leaders will face further tests this week. The European Commission president, José Manuel Barroso, will make his first trip to Athens since 2009 to meet with the Greek prime minister, Antonis Samaras, on Thursday, as a review of progress in meeting the terms of the country’s second bailout get under way.

Doubts are high that Greece will be able to present an acceptable plan to cut its budget, which could in turn force the creditors to cut off aid and push Greece into bankruptcy.

The assessment of Greek progress is not likely to be finished for several weeks.

In early afternoon trading in Europe the Euro Stoxx 50, an index of Euro zone blue chips, was down 0.44 per cent. The FTSE 100-share index in London was down 0.10 per cent.

Asian markets closed lower, with the Nikkei 225-share index in Tokyo down 0.24 per cent and the Hang Seng index in Hong Kong down 0.79 per cent.

The euro was at $1.2090, down from $1.2140 late Monday in New York.


© 2012 The New York Times News Service




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