Standard & Poor’s said it may downgrade the credit ratings of Germany and Italy, two of Europe’s largest economies, unless their governments rein in spending and cut debt.
Germany risks losing its triple-A credit rating in 18 months unless it curbs budget spending and reduces debt, said Konrad Reuss, managing director of sovereign ratings at Standard & Poor’s. Italy’s AA-minus rating is also at risk unless the government of Silvio Berlusconi goes ahead with plans to cut spending, Reuss said.
Germany and Italy, the first- and third-largest economies on the 12-nation euro region, are struggling to contain spending amid an economic slowdown. Inconclusive elections in Germany and the resignation of Italy’s finance minister this week left both countries in a state of political uncertainty, which may delay measures needed to spur economic growth.
There are three credit ratings agencies: S and P, Moody’s and Fitch. These are each independent companies performing independent analysis on the financial conditions of companies that publicly issue debt.
It is important to note the reason S and P is threatening to downgrade both countries’ credit ratings because of deficit spending. According to the CIA factbook, Germany’s debt as a percentage of GDP is roughly 65% and Italy’s is slightly over 100%. What’s interesting is the US’ debt as a percentage of GDP is more than Germany’s. According to the Bureau of Public Debt, the US as just under 8 trillion in debt and according to the Bureau of Labor Statistics us GDP is just over 11 trillion. This makes the US debt/GDP ratio a little over 70%.
The only difference between the US and Europe is their respective economic rate of growth. Europe is mired in a slow-growth problem while the US is growing at over 3%. But that won’t last forever. All economies eventually slow down. So, what will happen when the US economy eventually goes into a recession? Will the ratings agencies downgrade our debt?