Fitch Affirms Austria At 'AAA'; Outlook Stable

16 Nov 2012

Fitch Ratings has affirmed Austria's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'AAA'. The Outlooks are Stable. Fitch has simultaneously affirmed Austria's Country Ceiling at 'AAA' and Short-term foreign currency IDR at 'F1+'.

Austria's rating is underpinned by a diversified open economy, with high GDP per capita and no major economic imbalances. It has the lowest unemployment rate in the EU, the private sector is moderately leveraged and the current account has been in surplus since 2002.

The general government debt to GDP ratio stood at 72.4% in 2011, far higher than the 'AAA' median of 47.2%. However, it is still lower than the euro area median and in particular the larger euro area 'AAA' countries - France (86%) and Germany (80.5%). Fitch's base case is for Austria's debt to GDP ratio to peak around 76% in 2013 and to remain below 80%, even in more adverse macroeconomic scenarios.

Strong domestic institutions and a long track record of stability-oriented economic policy also support the rating. Recent changes to Austria's fiscal framework should help ensure prudent budgetary policy. The authorities' consolidation package aims to save EUR27.8bn between 2012 and 2016. Despite uncertainties over some of the planned consolidation measures, Fitch believes the fiscal adjustment will be sufficient to put the public debt ratio on a downward trajectory.

Risks from the government's contingent liabilities arise mainly from the Austrian financial sector. While there have been official capital injections, public finances have been less impacted by government support to banks than in other eurozone countries, including Germany. However, unexpected costs arising from the continued restructuring of banks already receiving official support could put pressure on public finances and the rating.

In the current uncertain operating environment, the high exposure of banks to emerging Europe also leaves them vulnerable to a systemic crisis in that region. Total Austrian bank assets in the central, eastern and south-eastern European region was 90% of Austria's GDP in 2011. Netting off local deposits reduces the exposure to 37% of GDP.

Renewed intensification of the eurozone crisis, triggering a deeper than expected and more prolonged economic slowdown in Europe, would damage the creditworthiness of the sovereign. As well as the direct impact from a recession in Austria, the government's balance sheet would also be weakened by likely further contributions to the EFSF and ESM.

A failure to closely implement the planned fiscal adjustment in Austria could also trigger a negative rating action. Spending cuts account for two-thirds of the government consolidation package, with the bulk coming in 2015 and 2016.

Source: http://www.reuters.com/article/2012/11/09/idUSWLA608820121109