Do the markets smell German blood?

Angela Merkel

Considering the way Egan-Jones–a petite credit risk ratings agency–goes about business, its punishing grade on Germany’s ability to repay state debts became in the end a resounding miss. On April 17, the company announced the decision to lower the qualification of the Federal Republic of Germany to A with a negative outlook from an A+. And this compared badly with qualifications awarded by the three domineering agencies in the sector, which Egan-Jones’ integrates in its own Hit-and-Miss system.

“The Hits-and-Misses aims to measure the extent to which S&P and Moody’s converge toward our rating. For example,” Egan-Jones explains on its website, “if we rate an issuer BB and another rater moves from BBB to BBB-, such an action would be considered a ‘hit’.” This wasn’t. Only Moody’s maintains Germany under negative outlook, but the overall grade is the top AAA.

Analysts at Egan-Jones defended their move on some well-known grounds that competitors apparently dismiss. First, Germany has done little to cut its exposure to its national banking sector or the economies of the eurozone’s periphery. Secondly, it may have a healthy balance trade–of €16.8 billion–, but in the Target 2 system, which is the interbank payment platform for the real-time processing of cross-border transfers throughout the European Union, Germany is owed some €700 billion “of which perhaps 50 percent would be collectible.” And then there is Deutsche Bank, which has adjusted shareholders’ equity to asset near 2 percent “and might still need €100 billion of support.”

Egan-Jones also blamed Chancellor Angela Merkel for her resistance against “European Union bonds and money printing” while “pushing for fiscal controls and the seniority of bailout funding.” This line went down very well among austerity-trapped Mediterranean countries, from Athens to Lisbon.

But in spite of claims of independence and having no commercial relations with corporations issuing bonds–“our only mission is to assist our buy-side institutional clients through accurate, risk averse, market sensitive credit ratings with predictive value”–, Egan-Jones is the living proof that we haven’t yet found an alternative to the big agencies: the ratings of this much smaller company are similar to those of Moody’s and S&P in 93 percent of cases. In fact, the figure was higher in 2006 just before the financial crisis, 97 percent.

It was the reaction on the markets what somehow was more telling. Rumours began to circulate in the morning of that Thursday about Germany suffering an imminent downgrade. In the capital markets, most commented on their belief that it was one of the largest ratings agencies that was about to take the triple A away from the only strong economic engine the eurozone still can boast about. The main stock market index of the country, the DAX, closed at -2.34 percent.

It turned out to be that little Egan-Jones, not Moody’s or even Fitch. But certain damage has been done. Today, investor notes echo the message sent by the economic institutes of Munich, Kiel, Halle and Essen forecasting a 0.8 percent GDP for 2013 but a 1.9 percent GDP for next year: their optimistic calculations sound less reassuring after the Egan-Jones event.

About the Author

Victor Jimenez
London contributor at, reporting about the City and the Eurozone economies. He regularly writes for Spanish newspaper group Prensa Ibérica--some of his features include shared work with journalists of The Daily Telegraph and the BBC.

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