When the U.S. debt was downgraded it didn’t create a ripple. Investors flocked to treasury bonds and the yields fell to record lows. But when Italy’s debt was downgraded to A by S&P, Berlusconi lashed out at them. Their yield on 10 year bonds rose to 5.67%. There were calls for Berlusconi to resign. The ECB, which recently has been buying Italian and Spanish bonds, has warned Rome that they can count on this kind of support only for a time. It’s not permanent.
If Germany’s debt were downgraded — a fantastical scenario considering German attitudes about debt — investors would no doubt continue to flock to the bund. It’s the political realties of the situation that matter most — not the financial. The world-wide bond market is founded on U.S. solvency. That’s the absolute standard. If the U.S. didn’t pay its debt, we’d probably have World War III. And Europe’s standard is Germany. It’s the country that the EU and the euro depends upon.