Our review included data from Standard & Poor’s and Moody’s along with statistics from the Economist Intelligence Unit and the CIA World Factbook. What we found is that is not all Triple-A ratings are the same.  Some nations with just a few million people and small economies might be quite as safe as the larger nations.

S&P  rates fewer than 20 nations “AAA” on Sovereign local currency ratings, Sovereign foreign currency ratings, and the Transfer and convertibility assessment. S&P’s current “AAA” sovereign rated nations are Australia, Austria, Canada, Denmark, Finland, France, Germany, Guernsey, Isle of Man, Liechtenstein, Luxembourg, Netherlands, Norway, Singapore, Sweden, Switzerland, the United Kingdom, and the United States.  We also reviewed the Moody’s ratings to make sure the discrepancies are not overlooked.

Read How The US Can Get Its Triple-A Rating Back

Our take is that not all Triple-A ratings are as reflective of risk as many investors would hope.  It was not until 2009 that S&P took away its “AAA” rating on Ireland, while Italy lost its “AAA” rating in the 1990s.  The big news earlier this year was a Japan downgrade, but Japan actually lost its “AAA” rating long ago.  Spain was “AAA” in the 1990′s, then “AA” and then was raised back to “AAA”  before losing the highest rating in 2009.

The Economist published its Economist Intelligence “The Country Risk Service” in January.  Among these, Norway was the only “AAA” rating.  The sovereign rating is meant to measure “the risk of a build-up in arrears of principal and/or interest on foreign- and/or local-currency debt that is the direct obligation of the sovereign or guaranteed by the sovereign.”  The United States was “AA” on this list, along with Canada, Denmark, Finland, Germany, Hong Kong, Netherlands, Qatar, Sweden, and Switzerland.

Australia

Australia is a solid “AAA” despite the major flooding the country experienced.  The country has a low population and a massive land mass that is rich in natural resources.  The company benefits from English as the native language, lower labor costs and again all that rich land.  It has only about 21.5 million people along with a GDP of roughly $889.6 billion per the 2010 CIA projections.  The “AAA” rating is stable at S&P and “Aaa” with a stable outlook at Moody’s.

Austria

Austria is another Triple-A rated nation with a mostly stable outlook. It has a rather low population of just over 8.2 million as of 2010 and its 2010 GDP was put at roughly $332.9 billion per CIA figures.  The nation is highly tied to Germany and it was not immune to the financial meltdown as many of its banks were making far too risky loans in Eastern and Southeastern Europe.  The EIU noted, “Even after the global economic outlook improves, Austria will need to continue restructuring, emphasizing knowledge-based sectors of the economy, and encouraging greater labor flexibility and greater labor participation to offset growing unemployment and Austria’s aging population and exceedingly low fertility rate.”  S&P rates a solid “AAA” with a stable rating and Moody’s has “Aaa” with a stable rating.  Our own risk assessment is probably a bit more critical than S&P and Moody’s and we’d see this is a harsher light if the economy suddenly plunges again and if its banks go back to excessive lending to lower-credit countries.

The drop in global stock markets, and fear of a rise in the financial troubles of Europe, and a belief that corporate earnings could be battered in the second half of the year has caused the cautious to seek American paper. There has also been a significant move into German and Japanese debt. All Treasury yields have fallen, as would be expected. Ten-year notes now yield as little as 2.9% and that may fall further as money flows into the instruments.

It is worth recalling that in December 2008, four money market funds yielded zero and among the 500 largest U.S. money-market funds, 41  have daily annualized yields at or less than .05%. The panic in the markets had driven money into that market although almost no one thought could ever be over-bought.

The Federal Reserve has a role in the pricing of “flight to safety” paper. It has continued to keep interest rates between zero and .25%. Cheap money is almost everywhere, although banks and business are often reluctant to use it as fears of another slowdown in the economy or a double-dip recession have continued.

The consistently low yield may tempt the Congress and the Administration to get back into the stimulus business. The $787 billion stimulus programs passed and signed into law early last year have only been marginally successful. There have been calls, mostly from White House economic advisers floating trial balloons, to pass a second stimulus. Congress has balked and will not even help 1.7 million Americans by extending unemployment benefits until November. The price tag of the legislation would be $33 billion, according to the CBO.  Members of Congress do not want to face their constituents in the mid-term elections just as they have added to the deficit.

The philosophical debate over whether austerity or stimulus is the better path to prosperity has become more raucous as large nations such as Germany and the UK make deep cuts in government spending.  Some reports say the UK government has told  cabinet members that their budgets could be cut 40%.  That will kick away most of the buttresses meant to support economic growth. Only a year ago, even the UK government believed that spending was the road to an economic turnaround.

The time is now, if the US government is to begin a new set of stimulus programs. Money is cheap, perhaps as cheap as it will ever be for the Treasury. The will of Congress is probably not great enough to take advantage of the current move of capital market money into American paper.

Economists would argue the an acceleration in the increase of US debt would drive US borrowing costs up. That is true unless the strong demand for Treasury debt continues in the short-term or even two or three years out. A successful stimulus package might improve the economy enough so that it could increase the tax base. The window for a second stimulus will probably have closed by then

Douglas A. McIntyre

Reuters:   Automakers had a setback in June, an indication that the industry is facing slow growth.

Reuters:   The House passed a bill to extend jobless benefits, but the Senate may reject it.

Reuters:   Walt Disney (NYSE: DIS) bought Apple Inc. (NASDAQ: AAPL) iPhone game maker Tabulous.Reuters:   Google Inc. (NASDAQ: GOOG) bought online travel software company ITA Software for $700 million.

Reuters:   Dell Inc. (NASDAQ: DELL) bought Scalent.

Reuters:   Ed Whitacre of GM said 2010 would be a good year for the company’s IPO

WSJ:   Habitat for Humanity became one of the ten largest homebuilders in the US.

WSJ:   France and Germany are at odds over how Europe should be rebuilt

WSJ:   Mortgage bonds backed by the US government have become more attractive.

WSJ:   There is confusion about how the new financial reform bill will treat derivatives.

WSJ:   Deepwater drilling off Cuba threatens Florida beaches.

WSJ:   Healthcare companies are facing huge changes in how they do business.

WSJ:   Goldman Sachs Group (NYSE: GS) is defending its actions on trades with American International Group (NYSE: AIG) during the financial crisis.

WSJ:   Apple Inc (NASDAQ: AAPL) is still allowing Google ads on its iPhone and iPad.

WSJ:   GE (NYSE: GE) said that CEO Jeff Immelt’s attacks on China and President Obama do not reflect the firm’s views.

WSJ:   Blockbuster will be delisted from the NYSE.

WSJ:   As factory activity rebounds many workers do not have the necessary skills.

FT:   Fears are growing over slow economic demand.

FT:   Apple is pushing its on-demand movies business segment of its iTunes store.

Bloomberg:   Portable missile defend plans may cost $43 billion.

Bloomberg:   Carl Icahn says he owns 38% of Lions Gate.

Douglas A. McIntyre

In support of Schäuble, Prime Minister Angela Merkel told The Wall Street Journal that “Germany’s growth and employment are rising—and therefore the world’s fourth-largest economy has no reason to rethink its dependence on its powerhouse industrial sector and large trade surplus.” Germany’s employment rate will not improve if the nations that buy its good cannot sustain their own recoveries. Germany’s industrial sector relies on the growth of the largest nations in the world and its own Eurozone “allies.” The austerity measures in Greece, Spain, and even the UK could bring their GDP growth to a halt. And, higher taxes on consumer spending are often regressive. The new UK VAT has just as much chance to undermine consumer activity as it does to bring the government more revenue.

There is a debate in the U.S.  about whether the $787 billion stimulus package worked. Even if the answer is “no”, voters have lost their taste for deficit spending and the mid-term elections are likely to drive that point home. A recent Wall Street Journal poll showed that incumbents will face an uphill battle in many districts.

Merkel’s economic policy is based on forecasts that likely won’t pan out. Germany will cut spending and raise taxes. That is certain. What is not at all certain is that its trading partners can do the same thing successfully.

Douglas A. McIntyre

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According to the ZEW Indicator of Economic Sentiment, the figure for Germany dropped by 17.1 points in June 2010. The indicator now stands at 28.7 points after 45.8 points in the previous month. This value is slightly above the indicator’s historical average of 27.4 points.“Thus, the financial market experts expect the German economic recovery that can be observed in the second quarter 2010 to weaken towards the end of this year. Despite the decrease of the economic expectations, the economic outlook still remains positive. Nevertheless, the economic sentiment is weakened by the uncertainty about the future developments of the debt crisis and the perspective of necessary cuts in public expenditure in EU-member countries.”

In other words, the pessimism about the economy has spread throughout Europe.

Douglas A. McIntyre

In a surprising statement, Merkel argued that stimulus efforts and a financial rescue of weak European nations are worsening the underlying deficit problems in the region.Merkel has taken the deficit reduction side of the “cut expenses”/”spend to stimulate” debate. Her rationale is compelling. Eurozone nations, especially those with weak economies,  have already stretched their sovereign financial borrowing to the limit. Greece, Portugal, and Spain need austerity and not government investment in future growth and improved employment.

Merkel’s advice is easy for Germany to take, but not so easy for its neighbors. The German economy has already shown some signs of brightening. It is the world’s second largest exporter after China, and Chinese data shows a huge recovery in its trade. Paired with budget cuts, Germany may run a surplus in the next few years.

Polls of international capital markets investors done by the WSJ and Bloomberg underscore the growing concern about the financial crisis in Greece, Spain, and Portugal. The most powerful buyers of fixed income paper believe it is only a matter of time before Greece defaults. The contagion from a default would be nearly inevitable as money would flee European debt.

Merkel held out little or no hope for a middle path, which would be that some of the $1 trillion rescue facility be used to increase the liquidity of weak Eurozone nations and allow them to keep their stimulus plans in place.  For Merkel, it is a black or white world–either austerity or default.

There have been suspicions that Germany would like to withdraw from the Eurozone or see the alliance fail so it could rely on its own currency to deal with trading partners. Merkel may get her wish if her public pessimism about the region turns out to be true and powerful investors continue to bet against the Europe.

Douglas A. McIntyre

The Germans will now try to teach the other, less financially well-off governments in the region how austerity is done. The German cabinet has approved a package of over $13 billion in budget cuts for 2011. The Germans, as a matter of course, do not spend most of their time at the beach while the government pays their jobless claims and medical costs the way that people in Greece and Spain do.

Douglas A. McIntyre

The new perception of the financial problems in Europe should not be new. Moody’s and S&P may have been late to catch up with them, but the agencies are only following their normal course of being perpetually late. It is more surprising that some much of the smart money from banks and hedge funds bet on positive economic news out of the region and the ongoing strength of the euro and pound.

An analysis of budget cuts in the EU is nearly impossible, at least if it is to be precise. Unlike cuts in the US which can be calculated on one scale, a $10 billion budget cut in Portugal is quite different from a $10 billion budget cut in Germany. The German number is modest. The CIA Factbook reports that Germany had a $3.8 trillion GDP last year. Greece’s was only $342 billion, barely larger than Ukraine.

The total of the budget cuts announced by the UK, Spain, Germany, and Greece in the last few weeks is only about $50 billion. And, sometimes, the figure measures cuts over more than one year. The cuts will be painful nonetheless.  For instance, UK deficit reduction may put 300,000 public employees out of work. Many government workers will have their compensation cut. Taxes will be raised in almost every nation among those that are in the process of huge financial adjustments. It would be reasonable to ask the extent to which these actions are regressive. In some countries they probably are. GDP growth depends on business expansion and consumer spending more than anything else. High taxes and low pay restrict economic improvement at some point, and there is no way to predict that tipping point although nearly every expert is willing to offer an opinion.

The catastrophe in the EU is beyond the point where it is worth debating regression. The countries have too much debt to continue to raise large sums to cover their deficits. The capital markets have lost faith as the cost of sovereign borrowing is rising rapidly. Greek borrowing costs triggered the bailout of its economy. The loss of confidence in the euro and other national budgets made the trouble regional and forced the raising of a credit facility of close to $1 trillion.

The causes of the deficits that have led to the austerity are generally said to be two-fold. Years of spending on social services have not been matched with tax receipts and as the population ages the trouble becomes more acute. In addition, the recession has cut tax revenue to the quick by bankrupting businesses and putting millions of people out of work in the EU. Budget cuts are necessary even if they risk a second recession. It is a gamble without an alternative.

The trouble with the budget cuts in the region is that they are extremely modest no matter how large they seem to be nation-by-nation. The GDP of the EU was $14.5 trillion in 2009, slightly larger than the US. In other words, the GDP for the region is more than 15% larger than that of America.

The American budget problem is measured in hundreds of billions of dollars. Europe’s, it seems, is measured in tens of billions. GDP growth in the old world is expected to be little better than 2% this year, if the World Bank and IMF are reasonable judges. The growth rate in the US is expected to be closer to 3% or even 4%. If these things are true, the budgets cuts in the  EU are far too modest to take away most of their deficit and sovereign debt problems, which means that short sellers and predatory speculators will begin to work against their currencies and bonds again and very soon. In some cases, the process has already begun, if the value of the euro is an indication.

It may be unimaginable to the people and politicians in the EU that they will be taking only a modest part out of their budgets compared to what it would have to be eventually. That means more cuts will have to come later, and, as hard as it may be to imagine, they will have to come under more dire circumstances

Douglas A. McIntyre

The euro is about to break below $1.21 after Angela Merkel of Germany set new short sales rules which were savaged by French officials.

Douglas A. McIntyre

Merkel has yet to get approval for her nation’s contributions to the nearly $1 trillion bailout fund for weaker European countries from the lower house of the German parliament. Her comments may be designed to move the approval along. But, her enthusiasm for helping Greece has been consistently questioned. German public opinion is against the move. Some German leaders have even asked large banks in the country to contribute to the bailout. That might be to protect the bank’s own interests, or to show multilateral support from several corners of the financial industry in Europe’s largest nation.Observers continue question Merkel’s motives. It could be argued that the collapse of the Eurozone partnership would strengthen Germany’s financial system because it could go back to its own currency, but the country would then have to deal with significant fallout, some of which is not obvious.

A collapse of the euro would mean a weakening of several economies, all of which import German goods. But, the bailout carries that risk as well. The austerity measures being adopted by Greece, Spain, and Portugal along with new taxes being implemented in the nations could be regressive. The actions may eventually hamper GDP growth, in which case Germany’s exports would suffer as well.

Some financial experts believe that Merkel is acting in the interest of German banks which hold billions of dollars in sovereign paper in Eurozone paper. Defaults could swamp the balance sheets of those banks.

But, the real reasons behind Merkel actions may be more complex and sinister. There is a great deal of evidence that some of Germany’s large banks have bet against both the euro and sovereign debt in the weakest nations in the region. If so, these banks, like other speculators, probably made billions of dollars on such deals.

Merkel may have to deal with the accusation, probably an accurate one, that Germany allowed its banks to take sides against the euro as the government helped drive its value down. How would it look if Germany then left the Eurozone and its banks became, under a set of circumstances helped by Merkel,  rich in the process?

Douglas A. McIntyre

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