Germany retains stable outlook with S&P's

Standard & Poor's has maintained its stable outlook on Germany's prized AAA credit rating – just over a week after fellow rating agency Moody's warned that the country's top notch score was under threat. In a statement published this morning, S&P cited Germany's "highly diversified and competitive economy" and "ability to absorbed large economic and financial shocks" as the reasons behind the decision.

"In our view, the German economy's overall resilience to the global downturn reflects years of corporate restructuring, wage restraint, and a high savings rate," said S&P. "These factors have also enabled Germany to generate sizeable trade and currency account surpluses, which have led to the economy's solid net external creditor position of more than 40 per cent of gross domestic product.

"In addition, Germany does not have major strains on private or public sector balance sheets, in our view. It therefore hasn't needed to undertake significant private sector deleveraging and fiscal consolidation, as other highly rated sovereigns have," the rating agency added. In its statement S&P said it would consider cutting Germany's rating if the net general government debt ratio reached 100 per cent of GDP from just under 80 per cent of GDP at the moment. But it said it did not expect that scenario to play out over the next two years.

It comes after Moody's said on July 23 that the eurozone's biggest economy could lose its top rating because of the "rising uncertainty regarding the outcome of the euro area debt crisis". Germany is the largest contributor to the eurozone's bail-out funds and Moody's pointed to the likelihood that the country would have to provide more financial support to struggling euro area nations. It also lowered its outlook for the Netherlands and Luxembourg, leaving Finland as the only AAA-rated eurozone country with a stable outlook.

The German finance ministry reacted to Moody's warning by insisting the country maintained "a very solid economic and financial situation". However, S&P today predicted GDP growth in Germany of just 1 per cent this year and next, down from an average of 3 per cent in 2010 and 2011. It noted that Germany's exposure to financial institutions in strained eurozone countries remained "substantial". And it said it expected domestic consumption to recover "only moderately over the next few years" as the crisis weighs on confidence, trading partners engage in debt reduction programmes, and amid a worsening outlook for the global economy.

The deteriorating global outlook was underlined today in a report by the Capital Economics think-tank, which said growth appeared to have slowed in most major advanced economies in July. It predicted that GDP would contract in the eurozone, the United Kingdom and Japan this quarter, adding that manufacturing surveys showed that "the fitful global recovery has once again run into serious difficulties – if indeed it can be called a recovery at all".

Meanwhile Moody's said today that its outlook on Greece's banking system remained negative, reflecting the "restrained operating environment" caused by a "deep and prolonged economic contraction, elevated sovereign credit risk and fragile depositor confidence". It said it expected Greece's GDP to contract by 7 per cent this year and 2.3 per cent in 2013. Yesterday Greece's political leaders agreed €11.5bn in additional spending cuts required to meet the conditions of its international bail-out, and qualify for the next €31.5bn installment of loans.