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.

France Defends Its Credit Rating

Said the Banque de France Gov'nor Noyer,
On the risk to the French "triple-A":
"But ze debts of ze Brits
Are so deep in ze sh£ts,
For comparison's sake, if I may."

French central bank head Christian Noyer may have sparked a war of words with Britain. Responding to S&P's putting his nation on negative credit watch, with the possible loss of its prestigious AAA rating, Mr. Noyer commented:

"A downgrade doesn't seem justified to me when you look at the economic fundamentals, or else a downgrade should come first for the U.K., which has a greater deficit, as much debt, more inflation, and less growth than us, and collapsing credit."

Trying to keep a stiff upper lip, a spokesman for Prime Minister David Cameron's Conservative government noted the credibility of the UK's deficit reduction plan. In truth, the British have nothing to gain by rising to Mr. Noyer's bait, since their public deficit, at 9.4% of GDP, is far above France's 5.8%.

European Financial Stability Negotiations

Said Merkel, "On this I agree
With Monsieur Président Sarkozy:
There's a pretty good chance
Of a downgrade for France
And political fallout for me."

Against the backdrop of the failure of the French-Belgian bank Dexia, French President Nicholas Sarkozy met with German Chancellor Angela Merkel on Sunday to resolve their differences over the path to European financial stability. The two announced to the press that a deal would be struck by the end of the month, meaning that agreement is still a long way off. France would like its banks to have access to the European Financial Stability Facility for capital support, but Germany - the biggest contributor to the EFSF - would face domestic political unrest. The Germans, for their part, would like troubled banks to draw on private or national capital sources, but France might face a downgrade if it tried to shore up its banks on its own. A Franco-German agreement is key to resolving the Greco-Italo-Hispano debt crisis that grips Europe.

Weekend Worriers

Whenever a bombshell discloses
After Wall Street on Friday night closes,
The market is fraught
All weekend with what
The chance of new highs or new lows is.

Listening to the weekend's feverish speculation as to the market effect of the S&P downgrade of US sovereign debt, one could not help but hark back to the Lehman failure in 2008, when the world waited breathlessly for the Asian markets to open and point to our global economic fate. Early results this time around indicate a sharp sell-off of anything risky, though not necessarily US Treasury bonds themselves, the risk perception of which has not really changed.

Downgrade Dilemma

That the GOP's debt ceiling polity
Viewed a US default with frivolity
So provoked S&P
That investors may flee
To Treasury bonds for the quality.

In a move that surprised no-one, the Standard & Poor's credit rating agency downgraded the debt of the US government to AA+ Friday evening, citing primarily the "weakened...effectiveness, stability and predictability of American policymaking and political institutions at a time of fiscal and economic challenges." Since, as many market analysts pointed out, the move was long overdue, no material market reaction was expected. Indeed, the expectation is that Treasurys will remain the safe haven whenever investors panic, so, to the extent that the downgrade has lowered the general risk tolerance, it may even cause net inflows to Treasury bonds. Let the Asian trading day commence!

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 V: the Finale

Though one may have felt left in the lurch
When "triple-A" bonds lost their perch,
The best self-defense
Is still common sense,
And one's own, independent research.

Ratings Week IV

Barney Frank made a stern ultimatum:
"Bond arrangers and the analysts who rate 'em
Should sever relations
That involve compensation
Since the agencies serve those who pay them."

Ratings Week III

"I admit," said an analyst from Fitch, 
"We've enabled some banks to grow rich, 
But a hard-line position 
In this competition 
Would only induce them to switch."

Ratings Week II

Said the banker: "My friend, It occurs to me
That you seem just like Standard and Poor's to me;
Though your scruples are real,
In pursuit of a deal
You would give up a wee bit of yours to me."

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."