Banks Are Pushing Germany to the Brink

Timing is growing trickier by the day, as little progress has been made since the sovereign debt-rating chief at Fitch Investor Services said in December that Germany's triple-A rating could "no longer be taken for granted." Likewise, Standard & Poor's at the same time pointed to the country's fiscal deterioration as an indication that it "has begun to fall behind its triple-A rated peers in terms of fiscal and economic indicators."

The agency said its rating of German debt could come under pressure if the country did not adopt "a consistent long-term approach in addressing the challenges of eliminating structural budget deficits, increasing employment and growth, and putting the increasingly overburdened health and pension systems on a more solid footing."

A downgrade, if it comes, would be a huge psychological blow to Germany at the same time it would make borrowing much more expensive. From a financial standpoint, the country would be forced to shrug off its mantle as a financial superpower and join the likes of Canada, Spain and Sweden among the world's somewhat flimsier AA+ credits -- a humiliating step down from AAA. The good news, according to Fitch managing director Fred Puorro, is that a downgrade would probably finally force Germany to consider deep structural change just as the U.S. did after its savings-and-loan crisis in the 1980s. A key improvement, he said, would be a consolidation in the number of banks from 2,700 to more like 1,500.

Conflicts of interest

To explain why the fit between the declines in Germany and Japan is so apt, we turn to Christopher von Schirach-Szmigiel, a finance professor at Penn State University and an authority on the subject.

Von Schirach-Szmigiel said in an interview that the similarity starts with the two countries' patterns of saving. In both Germany and Japan, most workers put their money in banks, not the stock market. The banks then take workers' money and put it to work in the debt and equity of corporations.