US debt rating threat could prove a boon for Germany | Business| Economy and finance news from a German perspective | DW | 21.04.2011
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US debt rating threat could prove a boon for Germany

Standard & Poor's warning the United States could lose its AAA rating may ultimately bring investment to Germany, reduce interest rates on its bonds and help the country lower its own debt.

graphic showing a US fla and the letter A for AAA rating

US Treasuries are no longer the safest bet for investors

With the United States' debt at risk of being downgraded, Germany could benefit from the dismal state of US public finances. Lower interest rates on its own bonds could help the country reduce its significant deficit.

On Monday, Standard & Poor's reassessed US sovereign debt and decided to put it on negative watch for the first time, meaning there is one-in-three chance the ratings agency will downgrade the country's hitherto cast-iron AAA credit rating in the next two years.

"Germany wins in this equation because it gets a dividend through stability," said Clemens Fuest, a member of the German finance ministry's technical advisory committee. "Interest rates will be pressed down as a result."

Expensive debt service

Germany maintains a secure AAA rating, pays less for a 10-year bond than the United States, and has a constitutionally-mandated 'debt brake.' In Europe, German bonds, known as bunds, have long been the benchmark for investors. The interest rates paid by European governments on its bonds are influenced by the so-called spread of the rates of, say, a Portuguese bond against its German equivalent.

But servicing Germany's two trillion euro debt will cost 40 billion euros this year alone - the German government's second-largest expenditure after costs for social welfare programs.

A stock broker clasps his head

Funds have to invest a portion of the money they manage into AAA-rated bonds

In the United States, public debt is equal to gross domestic product for an entire year. That puts the country on a similar footing to debt-stricken Ireland, Greece and Portugal, according to Unicredit economist Andreas Rees.

To make matters worse, upcoming elections are likely to hamper any substantial savings, he told Deutsche Welle. "That's when government austerity programs are very, very difficult."

Global implications

It isn't schadenfreude which has Germany's financial world predicting the end of the United States' sterling credit rating. Large investment funds in particular are required to secure portions of their investments through AAA-rated government bonds, meaning significant amounts of capital would be made homeless by a downgrade.

According to Joachim Scheide, an economist with the Kiel Institute for World Economy, any move by investors to exit the United States would have widespread repercussions, especially for export-heavy Germany.

"If [fund managers] believe the credit rating of the US is declining, one of the alternatives is to buy German bonds, which seem to be relatively safe as compared to other countries," he told Deutsche Welle.

"This does not mean… that Germany will benefit forever. The consequence would be a sharp fall in the dollar, and a rise in the euro. This would negatively affect the competitiveness of German and European exports."

'Safe-haven' effect

A suitcase full of dollars

The US still has time to get its finances in order

Germany has already experienced a 'safe haven' effect during the European sovereign debt crises because "bond rates were going up in the problem countries, and German yields went down at the same time," Scheide added.

Should the United States' creditworthiness be hit, higher interest rates on its bonds could endanger economic growth.

According to Unicredit's Rees, it's not too late for the country to consolidate its finances and avoid being downgraded, though. He likened Standard & Poor's cautioning the United States to a warning shot.

"There are other ratings agencies which have yet to react, so I don't necessarily see any severe effects at the moment," he said.

Author: Gerhard Schneibel
Editor: Nicole Goebel

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