One Last Warning for Europe

Moody’s and other credit rating companies are sometimes accused of announcing changes in their opinions after the fact. Its new warning on European sovereign debt comes right on time. The region may have only weeks, or even days, to take the actions necessary to keep the financial situation in the region from permanent destruction. Moody’s warning is broad enough to extend to Germany, the one pillar of the region’s finances, and perhaps the only hope of the eurozone’s continued existence.

Moody’s reported in a new analysis of the sector that “The continued rapid escalation of the euro area sovereign and banking  credit crisis is threatening the credit standing of all European sovereigns.” The reasons for the problem have been articulated nearly endlessly over the past few months. Political fractures have kept nations from policies that might improve their deficits and, eventually, their national debts. There is no single plan for the eurozone to rescue its weakest members. Defaults in Greece and Italy may be so large that other eurozone members will be unable to afford a rescue. There in no large fund formed yet to create a firewall to protect the rest of the region should Italy default.

There is one issue that the report’s content implies that has not been implied before — at least by any voice of authority. The sovereign rating of Germany could be at risk if some large balance of the rest of the region falls into deep financial trouble. Germany may be asked to fund much of a massive bailout, which could go above a trillion euros. That would put a budget strain on the country or, before that happened, a revolt of voters against more funding. Alternatively, Germany could find much of the eurozone effectively dissolved. The impact of that on German exports cannot be calculated, but would certainly be negative. GDP expansion in many of its neighbors that are also its trade partners would go negative. That, by itself, could end what has now become very modest growth of the Germany economy.

The Moody’s warning is, above all else, a warning about Germany.

Douglas A. McIntyre