PARIS (MNI) – Egan-Jones Rating Co. has downgraded Germany’s
sovereign debt by one notch, citing the large financial burden being
imposed on Berlin in ongoing efforts to address the debt problems in the
Eurozone’s periphery.

The agency said it was knocking Germany’s rating down to AA- from
AA and keeping it on negative watch, which implies another downgrade is
likely at some point in the future. Egan-Jones, which is generally
viewed as applying more stringent criteria than Standard & Poor’s,
Moody’s and Fitch, already had Germany two notches below the top grade
of triple-A. The three major rating agencies all have Germany at
triple-A, or the equivalent.

Sean J. Egan, Managing Director of Egan-Jones, said the agency
decided on the downgrade, “because Germany will be footing a significant
portion of the bill for the EU’s problems (via the ECB, the EFSF, the
ESF, and the IMF), and it will hurt credit quality.”

Egan conceded that yields on German paper are “likely to remain
low, because Germany is among the strongest countries in the EU and
[because of] the ECB’s liquidity efforts.” Nonetheless, “investors have
already been harmed by the decline in the euro and the overhang from
increased overall debt,” he said.

The agency is not considered one of the major rating houses and
generally gets less notice in the markets. But it has often anticipated
later moves by its three larger competitors, most notably when it
downgraded the United States last year – a move that was later followed
by S&P.

In a document summarizing Germany’s economic and fiscal position,
Egan-Jones noted that the country’s debt-to-GDP ratio, near 86% last
year, along with a deficit of 4.6% are “weak (and getting weaker) for a
top-tier country.” While unemployment was only 6.8%, much lower than the
European average, it “will probably increase as many EU countries
implement austerity measures,” the agency predicted.

While the government in Berlin insists that private investors bear
more of the costs of any future European bailouts, the cost of the
bailouts “is likely to be absorbed via increased support for the EFSF,
the ESM, the ECB,” Egan-Jones said. That means additional financial
burden for Germany.

The agency noted that the euro’s recent decline would be a boon for
major exporters in Germany, particularly in the auto, chemical and
pharmaceutical sectors. “However, imports will cost more and the
economies of other EU countries are likely to remain weak, and Germany
will be expected to contribute support.”

–Paris Newsroom, +331-42-71-55-40; bwolfson@gmail.com

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