March 27, 2020 / 12:44 PM / 2 months ago

Ramped up spending puts Germany's triple-A rating at risk - Credit Benchmark

LONDON, March 27 (Reuters) - Aggressive spending to limit the damage inflicted by the coronavirus outbreak could put Germany’s triple-A credit rating at risk, according to research from Credit Benchmark.

Germany agreed on Monday a package worth up to 750 billion euros ($808.43 billion) to mitigate the damage from the coronavirus outbreak to Europe’s largest economy, with Berlin willing to take on new debt for the first time since 2013.

According to research from Credit Benchmark, which collates the internal credit risk views of more than 40 financial institutions around the world, Germany has a consensus rating of AAA and a positive fiscal balance of 1.1%. Its stimulus plans may put those in danger.

“Germany’s massive stimulus package means that it needs to suspend its adherence to its self-imposed balanced budget rule, and the underlying probability of default at 1.24 basis points, puts it very close to being downgraded ...”, said David Carruthers, head of research at Credit Benchmark in London.

He noted that on the firm’s scale of default risk, triple-A rated issuers ranked between 0 and 1.25 bps. The United States could also be at the risk of a ratings downgrade, he added.

Germany’s ratio of debt to gross domestic product stands at 60%. During the financial crisis 2008/09, it ballooned by roughly 18 percentage points from 64% in 2007 to 82% in 2010.

On Monday, an analyst with Europe’s Scope credit rating agency told Reuters that Germany is not at risk of losing its triple-AAA debt rating due to the coronavirus pandemic, pointing to a solid fiscal policy in recent years.

Germany is rated triple-A by all three major ratings agencies. A triple-A rating is given to only a select group of countries with the strongest finances in the world.

The scale of stimulus being rolled out by governments has raised concerns about the debt profile of governments. The cost of taking out insurance against a sovereign default in countries such as Italy has risen recently.

The coronavirus outbreak will see a 2% recession in the euro zone this year, S&P Global estimated on Thursday.

Italy has higher levels of government debt and lower levels of government investment than its European peers and a negative fiscal balance of -2%, according to Credit Benchmark.

Its data put the probability of default at 31 basis points, placing Italy 2 bps away from being downgraded. Italy is currently rated BBB by S&P and Fitch, two notches above junk territory.

The crippling economic costs of the coronavirus outbreak could push Italy’s debt-to-GDP ratio over 145%, Scope warned on Thursday. (Reporting by Dhara Ranasinghe; additional reporting by Marc Jones; editing by Larry King)

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