Financial news sites are abuzz with today’s announcement that Egan-Jones downgraded Germany from AA- to A+, a full four notches lower than Standard & Poor’s, Fitch and Moody’s. The big three have maintained Germany at the highest rating, AAA.

Once again, this small rating agency proves that its goal is to serve its customers by protecting them from risk rather than please those they rate. Reasons for the downgrade make sense, regardless of how politically incorrect the action may appear.

In one sense, it isn’t about Germany’s economy, per se. Actually, though they’re feeling the pain of Eurozone contagion, their economy is still fairly strong. It is about their exposure insolvent European countries though, to the tune of some 0.7 trillion euro. Such outstanding loans increase Germany’s debt to GDP from 89 to 114%, a level clearly not sustainable for any length of time.

The euro’s had a rough road this year, dropping from strong levels in late February to recent lows, including today’s momentary drop upon Egan-Jones’ announcement. However, it’s still maintaining about 125, levels slightly higher than last month’s lows near the 120 level.

Egan-Jones, however, is consistently gaining attention with their bold downgrades amidst a sea of cronyism and ratings that tend to drop too long after the fact to help investors. And some of the headlines on the announcement offered their own entertainment.

• Small rating agency downgrades Germany
• Angela is not going to be happy!
• The unstoppable Egan-Jones juggernaut continues

Zero Hedge provided a quote from the Egan-Jones announcement:

6/26/2012: Federal Republic Of Germany: EJR lowered AA- to A+ (Neg.) (S&P: AAA) (3413Z GR)
Stuck – whether or not Greece and other EMU members exit, Germany will be left with massive, additional, uncollectable receivables. Via the ECB’s Target 2, Germany is owed EUR700B of which perhaps 50% is collectible and then there is the banks’ southern EMU exposures.  Germany’s debt to GDP was 87% as of 2011. However, increasing Germany’s debt by EUR700B to EUR2.9T for its indirect exposures raises the adjusted debt to GDP to 114%. The deficit to GDP of 1.0% is reasonably strong. Unemployment is 6.8% but will probably rise as global economies continue to show weakness. The positive (EUR130B) balance of trade and the positive (EUR196B) current account help. Inflation has been moderate at .9% (per Eurostat). 

 We used the IMF’s data for Germany’s debt which is 10% great than Eurostat’s data. German chancellor Angela Merkel continues to create tension with EU member states by resisting calls for EU bonds (shared liabs.), money printing calls and for her pushing for fiscal controls and the seniority of bailout funding. Germay is likely to be outvoted by other ECB members and therefore will have greater prospective exposure. Watch for the EFSF and the ESM morphing into banks (thereby depressing eventual recoveries) and a rise in the number of euros. The fallout from a likely Greek exit needs to be monitored. We are cutting to “A+”.

As sovereign contagion continues to grow and spread, confidence in sovereign monetary policy will wane as well. As it becomes apparent that fiscal policy is eroding wealth, there will be a flight to wealth preservation assets such as precious metals.

Repeatedly the ability to know who to trust is challenged. And it’s especially during times such as these that the investor needs to be educated about opportunities to take more control of their personal finances. And, again, we remind investors that precious metals should be considered as a foundational position in any portfolio, offering personal control, oversight and a long history of maintaining value through thick and thin.

For your prosperity,

J. Keith Johnson
The Gold Informant