Germany Debt Downgraded by Egan Jones

Germany Debt Downgraded by Egan Jones

Is Europe’s Atlas beginning to shrug at the weight of the continent’s collective sovereign debt?  Courtesy of John Mauldin’s Weekly Letter:

Speaking of downgrades, Egan Jones downgraded Germany from AA to AA- and put the country on negative watch. This is important, as this is what I believe to be the most credible rating agency; and over 95% of the time the other “Big 3” agencies generally follow their lead, after a period of time. Part of the reason for the downgrade is all the debt that Germany is guaranteeing. Sean Egan was one of the first serious analysts to suggest that Greece would default. He was talking a 95% eventual default a long time ago. (Very nice gentleman, by the way. Or maybe he just left his Darth Vader mask at home when I met him.)

Sean Egan cited Germany’s sliding credit quality and increasing debt-to-GDP ratio (Source: Forbes):

Speaking with Forbes, Egan-Jones co-founder Sean Egan said “[Germany’s] credit quality has slipped and its debt-to-GDP ratio is increasing.”  In the report, the analysts noted the Eurozone’s top dog has debt exceeding €2 trillion ($2.6 trillion) and cash of about €235 billion ($301 billion).  Debt-to-GDP levels hit 83% in 2010, will probably hit 92% in 2011 and could reach 116.7% by 2013.

“Germany does benefit from flight to quality flows,” explained Egan, adding that mathematics doesn’t lie, and eventually, someone will have to pay the bill. “The major positive German has realized over the past year has been the significant decline in its funding costs, […] the two-year debt yield has declined from 2% to near 0 while the 10-year has declined from above 3% to below 2%,” read the report.

Triple digit debt-to-GDP ratios have been a tipping point for other European canary sovereigns in this coalmine of debt.  But as Egan notes, the flight to quality has pancaked German yields over the past year:

German bond 10 year yield January 2012 Bloomberg

(Source: Bloomberg)

Towards the end of the Forbes piece he cites unfavorable demographics as a concern for not only Germany, but the entire developed world (Japan, the US, and Europe).  To me, this is THE real lever point – because with favorable demographics, you might be able to grow out of any mess…but with an aging populace, you’re on a sinking ship, no matter what you do.

And for more on demographics and economics, be sure to check out our interview with subject matter expert Harry Dent.