Credit Watch on the Rhine

Said Moody's: "In pondering whether
We ought to rate Germany nether,
We considered the cost
If the euro is lost,
As well as to hold it together."

"In view of Berlin's liability
To backstop the euro's fragility,
We regard it as likely
Madrid really might be
Too much for their funding ability."

Moody's Investors Service has announced that it sees a negative outlook for its Aaa credit rating of Germany. Though the nation remains one of the strongest in Europe, its vast liability for potential bailouts of Spain and Italy, as well as the exposure of its banks to euro zone's weaker economies, would make for a severe test of Germany's financial resources. With negative outlooks also placed on the Netherlands and Luxembourg, this leaves only Finland - which has fewer foreign financial entanglements - as a solid triple-A, according to Moody's (S&P and Fitch have made no such changes). The critical issue now is to maintain the ability of the Spanish government to finance its deficits, without which a fresh round of public (primarily German) support will be required.

Die Eine Drei

Of the euro zone countries today,
Only one truly rates triple-A;
We needn't say who,
But, to give you a clue,
They're north of the Appian way.

The answer to whose credit is best in the euro zone is the same as whose cooking is Wurst. Aside from Germany, only three other EU members still enjoy AAA ratings: Finland, Luxembourg and the Netherlands. Most knowledgeable and objective observers agree, however, that it's only a matter of time before the latter three are knocked from the top rating level.

First to go may be the Netherlands, whose minority coalition government resigned on Monday amid an impasse over budget negotiations. Long a fierce advocate of euro fiscal discipline, the Dutch could not agree on how to get their national deficit within the required limit of 3% of GDP, as opposed to the currently projected 4.6%. Discussions broke down after the right-wing Freedom Party, headed by the flamboyant Geerd Wilders, pulled out of talks with the center-right liberal party of Prime Minister Mark Rutte. Ratcheting up the tension, Moody's warned that a "weaker commitment to fiscal discipline" in the Netherlands could put "downward pressure" on the country's triple-A rating. It may soon be einsam at the top for Germany.

Atlas Shrunk

If the strong want to lift up the weak,
As the Germans and French would the Greek,
It is best if such acts
Do not overly tax
The Teutonic or Gallic physique.

Plans to support the public finances of Europe's peripheral nations have been thrown into fresh doubt by the news that France's Aaa rating from Moody's is under pressure.  The rating agency's French analyst, Alexander Kockerbeck, noted that France has "a lot of additional risks we did not have in the past," pointing to "developments in the euro zone."  The €440 billion European Financial Stability Facility is designed to let the triple-A countries guarantee some of the debts of the shakier ones.  If France is downgraded, then the EFSF must either do without the €158 billion French participation, or accept a double-A rating.  Germany may be bracing for a heavier burden.

Negative Outlook on Uncle Sam

Said Moody's: "Our negative view on
The debt deal you voted anew on
Ponders revenue ruts
Caused in part by the cuts
Which we anyway doubt you'll come through on."

In announcing its negative outlook on the Aaa rating of US sovereign obligations, the Moody's rating agency cited the untested framework set up by the debt ceiling bill passed by Congress and signed into law yesterday by President Obama. Moreover, said Moody's, Congress may lack the fiscal discipline to make the hard decisions required later this year to narrow the deficit by another $1.5 trillion over the next ten years. Finally, the rating agency pointed out that federal revenues may not rise as fast as government forecasts assume. Of course, in the feedback loop between fiscal policy and the economy at large, deficit cutting can contribute to a slower economy.

Warning to Washington

Said the national raters of credit:
"The Congress appears not to get it;
We may downgrade a notch
While we wait and we watch
To see how out of hand they will let it."

The August 2 deadline, by which the US Congress must raise the federal debt ceiling to avoid defaulting on Treasury bonds and other obligations, is rapidly approaching. However, both Moody's and S&P have now warned that a downgrade of America's sovereign debt rating may come earlier, if the deadline looms closer without an apparently likely political compromise. This of course has alarmed the financial community, which may finally tip the political scales toward reaching a solution.

Rating Agency Hearing

"Triple-A," admits Warren Buffett,
"Is a term one may rightfully scoff at,
But as owner of Moody's,
I'll tell you the beauty's
Their business plan still turns a profit."

Ratings Week I

A CDO analyst from Moody's
Confessed: "I've neglected my duties.
We'll soon be downgrading
Some triple-A ratings
When everyone sees that we blew these."  

Who Rates the Raters?

"Credit ratings I don't understand,"
Said a moody young man from Jharkhand,
"Their standards are poor,
And conflicted, I'm sure -
And the outcome seems canned, if not planned."