At first glance, it would appear that Germany emerged unscathed from Standard & Poor's blanket downgrades of nine euro-zone member states on Friday. Germany's triple-A rating was left intact and the country was even taken off the watch list, with its outlook upgraded from "negative" to "stable."
But a closer look reveals that one of the biggest losers is Chancellor Angela Merkel herself. S&P, after all, cited Europe's debt-crisis management as a significant factor in the downgrades. It is, the ratings agency wrote, "our view that the effectiveness, stability, and predictability of European policymaking and political institutions have not been as strong as we believe are called for by the severity of a broadening and deepening financial crisis in the euro zone."
And Merkel has already begun taking action in response -- by giving serious consideration to new laws that would significantly reduce the impact of the ratings agencies.
The move comes on the heels of Friday evening's announcement by Standard & Poor's that it was downgrading the credit ratings of nine euro-zone member states. Most significantly, both France and Austria lost their top-flight, triple-A ratings. Cyprus, Italy, Portugal and Spain were dropped by two notches with Malta, Slovakia and Slovenia filling out the downgrade list.
Blasting the Rating Agencies
Conservative legislators in Berlin are now looking into relaxing regulations requiring insurance companies and funds to dump securities once their issuer loses its triple-A rating. Currently, such laws are inflexible and "result in a self-magnifying effect," said Merkel, following a weekend meeting of senior officials of her Christian Democratic (CDU) party in the northern German city of Kiel. "It makes sense to take a closer look and consider where one could make a change to the law."
Other German politicians were more pointed in their remarks on the S&P downgrade. Powerful German Finance Minister Wolfgang Schäuble said that he didn't think the rating agency had fully appreciated the significance of steps already taken by Europe in its attempt to combat the ongoing euro-zone debt crisis.
"I don't believe that Standard & Poor's has really understood what we in Europe have already set in motion," Schäuble told public radio station Deutschlandfunk. "In addition, Standard & Poor's has perhaps not sufficiently examined measures undertaken to reduce deficits by all those countries in Europe that have been hit by difficulties."
Economy Minister Philipp Rösler, who is head of Merkel's junior coalition partner, the Free Democratic Party, complained that "the euro is under attack." Senior CDU parliamentarian Michael Fuchs said that the ratings agencies use different criteria in Europe than they do in the US and Britain. Elmar Brok, a leading CDU politician in European Parliament, said the downgrades "are almost the equivalent of a currency war."
Negative Effects for the EFSF
Markets on Monday appeared to be taking the downgrades in stride with several analysts noting that the move had been expected for several weeks, particularly since S&P had placed all the countries now downgraded on its watch list last December. Rating agency Moody's, which has France on a stable outlook, said on Monday it saw at present no reason to downgrade the country. Fitch, the third in the triumvirate of powerful rating agencies, said last Tuesday France would likely retain its triple-A rating through 2012.
Still, the repercussions of the downgrade could be significant. Whereas Merkel had hoped that measures passed late last year to strengthen rules on budgetary discipline and move fiscal integration forward in the euro zone might be enough, she now faces the prospect that the €440-billion temporary euro bailout fund, the European Financial Stability Facility, could now lose its triple-A rating as well. Should that happen, it could mean that the EFSF will need additional funding or that it will not be able to achieve its hoped-for impact.
German commentators on Monday take a closer look at what the effects of the Standard & Poor's downgrades might be.
Financial daily Handelsblatt writes:
"Everyone knows that the ratings agencies lag behind the assessments that have already been made by the markets. Which is why investors are now concerned that it won't be long before the next downgrade. ... But will this spiral be broken by complaining about the power held by rating agencies? No. Would a European rating agency improve the situation? No. The problem is the agencies have become too important. Politicians, regulators and investors are to blame: banks are allowed to use the ratings when calculating capital ratios, insurers are only allowed to buy bonds if they have certain ratings and the same holds true for many funds."
"Which is why Merkel's vague proposal to reduce the influence of ratings by changing the laws is correct. Ideally, financial service providers should be allowed to operate independently of ratings. Otherwise, we will no longer be able to free ourselves of the ghosts we ourselves have called to life -- ghosts that have become powerful and independent. They will be able to cause much more trouble."
The Financial Times Deutschland writes:
"Even if there were a European rating agency, it would not have reached a different conclusion than the one reached by Standard & Poor's. There is as yet no structural solution to the debt crisis. France is in fact no longer a top debtor. And should Hungary enter insolvency, Austria would be in trouble. Even Germany, given the additional burdens of saving the euro, is in danger of losing its top rating. There are no secret agendas being followed, there is no American conspiracy."
Conservative daily Die Welt writes:
"These days, there are a surprising number of politicians who lend credence to conspiracy theories which hold that London and New York are focused on beating down the euro. It is correct that the euro crisis is the result of a conspiracy, but it is one between the politicians and the voters in heavily indebted countries. In recent decades, they have entered into a secret deal at the expense of a third party (the next generation): Citizens have increasingly demanded more state benefits than they have been willing to pay for in taxes. And politicians have granted these unaffordable wishes in order to be re-elected. It was only possible by taking on higher debts."
"Now, the trust is gone, and citizens of crisis-stricken states have begun moving their money overseas. Investment funds and banks have likewise lost their trust in Europe. But of course, only the Anglo-Americans and their ratings agencies are guilty. Those villains."
Center-left daily Süddeutsche Zeitung writes:
"'Do what we say, you have no choice.' That is the clear message from Standard & Poor's. In delivering it, the rating agency hasn't even shied away from placing euro-zone member countries on a level with developing countries. Those who lend Italy or Spain money are, according to S&P, taking the same risk as those who send their money to India, Colombia or the Bahamas. That is absurd. That is a joke..."
"But the S&P downgrade is particularly dangerous for another reason. The agency hasn't just expressed its opinion as to where investors should invest their billions at what risk. Rather, they have launched an attempt to directly intervene and influence European politics. That is not the job of a rating agency. The Americans have become increasingly open in their attempts to push the Continental Europeans to adopt the Anglo-Saxon economic and financial model. That means printing money whenever necessary in order to bailout the banks or to finance economic stimulus packages. Those who don't play along get bad ratings."
"European Union governments have two choices. They can play the game of the rating agencies ... Or they can take consequences and mothball the rating system. ... The monopoly of the three largest rating agencies needs to be broken. Analysts must be held liable for their verdicts and the ratings scale needs to be reformed. Otherwise, the game will continue, and will only end when all countries have lost their financial credibility."