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Germany, France May Hurt AAA Ratings in ‘Ponzi Game’
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Germany and France are among top- rated euro-area states that may compromise their AAA grades by standing behind the debts of weaker members with their 750 billion-euro ($955 billion) stabilization fund.

The package is “making debt profiles deteriorate, potentially damaging the ratings of core sovereigns,” said Stefan Kolek, a strategist at UniCredit SpA in Munich. “It’s a kind of Ponzi game at the highest level.”

The unprecedented loan package was designed by the European Union and the International Monetary Fund to halt a sovereign- debt crisis that threatened to push Greece, Portugal and Spain into default and shatter confidence in the euro. As part of the support plan, Germany’s Bundesbank, the Bank of France and the Bank of Italy started buying government bonds yesterday.

Bonds of Portugal, Spain and other deficit-plagued nations on Europe’s periphery soared yesterday and bunds -- the safe haven for holders of European government bonds -- weakened as the threat of a Greek default receded. The cost of insuring against sovereign losses using credit-default swaps tumbled yesterday, with contracts on Greece sliding 370 basis points, their biggest one-day decline, to 577, according to CMA DataVision.

The average Standard & Poor’s rating for the five biggest countries using the euro is AA-, three levels below the top, without adjusting for size, according to Gary Jenkins, a strategist at Evolution Securities Ltd. in London. After Germany and France, the largest top-rated nations that use the common currency are the Netherlands, Austria and Finland.

‘Another Look’

“The fact that they’ve made clear that there will be no defaults, plus the sheer size of the fund, may make S&P take another look at all the ratings,” Jenkins said. “At least, it should do.”

S&P officials in London didn’t respond to a phone call seeking comment.

Credit swaps on Greece declined again today, dropping to 562.5 basis points, CMA prices show. Italy fell 2 to 155 and Spain was 2 basis points lower at 172.5. Swaps on Portugal increased 6 basis points to 260.5, according to CMA.

The euro weakened 0.7 percent against the dollar to $1.2685, erasing yesterday’s gains.

The stabilization fund risks creating “more debt instead of cutting debt, as it obliges EU countries to buy troubled debt from member states,” said Kolek.

Moral Hazard

The rescue package, which may be a first step toward quantitative easing, may compromise the independence of the European Central Bank, according to Jim Reid, head of fundamental strategy at Deutsche Bank AG in London. It’s also part of a process that is increasing so-called moral hazard “exponentially,” he wrote in a note to clients.

The package “is not particularly pro-growth,” Reid wrote in the note. It may “be looked back on as a landmark day for the ECB. Their total independence may now be increasingly questioned.”

As well as the risk of hindering growth, by reducing the likelihood the euro area’s weaker members will default, the stabilization fund may slow down fiscal consolidation in the stronger members, according to Eric Sharper, an analyst at Credit Agricole SA in Paris.

“This raises the possibility that stronger EU members, with more financial flexibility and under less scrutiny, will show less urgency in their own deficit-reduction programs,” he wrote in a note.

By John Glover

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