In a post yesterday, we talked about how France’s loss, was Germany’s gain. The fact that the former was downgraded while the latter wasn’t means that the two are no longer plausibly on the same level during Eurozone crisis negotiations. Merkel has the upper hand now, as not only did Germany not lose its AAA, its outlook was revised upward to stable.In a note posted at FT Alphaville, RBS’s Jacques Caillou expands on this idea.
The market implications of the ratings review are worse than a whole downgrade of the region owing to the increased political wrangling, questions on the EFSF/ESM firewall and the fact that flight to quality still has somewhere to go. Germany comes out as a clear winner and will have its position at the negotiating table strengthened even further. The French downgrade will complicate future negotiations around fiscal integration and comes at a delicate time domestically. The loss of the AAA is likely to be politicised in the run up of the upcoming general elections and could lead to an increase in popular support for fringe parties.
Overall, the most notable outcome was the clear differentiation between Germany and all other AAAs countries. Germany comes out as a clear winner with a stable outlook. The French downgrade comes at a d time and will likely complicate domestic politics ahead of the critical general elections. Likewise, France’s position at the European negotiating table is likely to be weakened vis-à-vis Germany. This might render future negotiations surrounding fiscal integration even more difficult.
The key gist here: Just because the impact was “political” doesn’t mean it’s not very problematic, especially since the whole thing is really just about coming up with a politically viable solution to the fiscal integration problem.