Investors could reallocate money
How Germany benefits from the US downgrade
08/02/2023, 06:55 p.m
The rating agency Fitch has withdrawn the coveted top rating for creditworthiness from the USA. According to experts, the downgrade has no direct impact on the attractiveness of government bonds – but Germany could still be the beneficiary.
According to economists, Germany can become a beneficiary after the rating agency Fitch withdraws its top credit rating for the USA. “Especially in troubled times, the federal government will probably be able to benefit even more from its triple-A status,” said Jens Boysen-Hogrefe, tax assessor from the Kiel Institute for the World Economy (IfW). Now that demand for top-rated “AAA” paper will focus on “smaller issuers, of which Germany is the largest,” they would have an advantage. How big that will be depends on market conditions and risk perception.
According to the European rating agency Scope, the US downgrade has no direct impact on the attractiveness of German government bonds. “However, some institutional investors with very conservative investment guidelines could no longer invest in US Treasury to the usual extent.” This in turn could lead to a certain reallocation of investor funds in favor of German bonds. “However, the scope of these shifts is difficult to estimate and is likely to be moderate,” says Scope.
The Federal Ministry of Finance emphasized the goal of making public finances in Germany sound and sustainable. “It is essential to reduce deficits and debt ratios,” said a spokesman. “Germany’s positive credit rating remains the best insurance in the event of further crises.”
DIW President Marcel Fratzscher does not expect any major changes in investments and capital flows. “The US dollar is and will remain the global reserve currency, from which the USA, even with significantly higher debt than Germany, is benefiting greatly,” said the head of the German Institute for Economic Research (DIW). “It is not the amount of national debt that is decisive for a country’s financing conditions, but the future-oriented use of the money.” The greatest potential for better financing conditions for the German state and for German companies does not lie in lower national debt, but in a strengthening of the international role of the euro.
Bunds are highly liquid
Commerzbank chief economist Jörg Krämer does not expect interest rates to fall significantly for the federal government either after the US downgrade. “The interest rate effect on federal bonds is unlikely to be measurable,” said Kramer. “Other factors are currently much more important in the bond markets and overshadow everything.” Investors were primarily looking at the development of inflation rates and whether the interest rate peaks at the US Federal Reserve and the European Central Bank (ECB) had already been reached.
Unlike the USA, Germany’s creditworthiness is given the top rating of “AAA” by all major rating agencies. This signals buyers of federal securities a very safe investment with an extremely low risk of default. This status as a “safe haven” means that Germany can borrow comparatively cheaply: Investors are willing to accept a lower return for this high level of security.
In addition, Bunds are highly liquid – owners can buy or sell them anywhere in the world at any time. The main reason for the top rating for Germany is the comparatively low level of debt. According to the economists, the debt level will fall to 65.3 percent of gross domestic product this year, and then to 63.5 percent in 2024. For comparison: Fitch predicts 112.9 percent for the USA this year and even 118.4 percent for 2025.