Fitch Affirms Germany at 'AAA'; Outlook Stable

Fri Jan 24, 2014 12:11am EST

LONDON, January 24 (Fitch) Fitch Ratings has affirmed Germany's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'AAA' with Stable Outlooks. The issue ratings on Germany’s unsecured foreign and local currency bonds have also been affirmed at ‘AAA’. Fitch has also affirmed the Short-term foreign currency IDR at 'F1+' and Country Ceiling at 'AAA'. KEY RATING DRIVERS The affirmation of Germany's sovereign ratings reflects the following factors: The general government debt to GDP ratio (GGGD) has already started to fall in Germany, unlike its ‘AAA’ rated eurozone peers and France (AA+/Stable), UK (AA+/Stable) and the US (AAA/RWN). Fitch estimates GGGD to have eased to around 79.4% in 2013 from 81% in 2012. Germany continues to have the components of a declining public debt path. The economy is growing, the budget position is relatively favourable and nominal interest rates are low. Furthermore, while GGGD remains elevated compared with the 'AAA' median of 46.7%, it is within the range considered by Fitch to be consistent with a ‘AAA’ rating. The government continues to be within medium-term fiscal targets with a margin. The general government structural balance remained in positive territory in 2013 after moving into a surplus for the first time since re-unification in 2012. This is well within the 0.5% of GDP deficit medium-term objective set under the Stability and Growth Pact. The federal structural balance is expected to again be better than the 0.35% of deficit limit from 2016 set under the German constitution. Public finances were also slightly better in 2013 than expected in Fitch’s forecast in August 2013. Headline general government budget is estimated to have been in balance rather than the expected small deficit. The new coalition government is committed to reducing public debt. Under the CDU/CSU and SPD coalition agreement, the partners will adhere to the target of a structurally balanced budget in 2014 and a headline balanced budget in 2015. The government has also maintained its commitment to reducing GGGD to 70% in this parliament’s lifetime (by 2017). This is despite the coalition agreeing to additional net spending of EUR23bn (0.8%) spread over the next four years, financing of which is yet to be clearly specified. The risk from contingent liabilities from the eurozone crisis continues to ease on improved regional governance, economic recovery and ECB policy. Germany’s contribution to the EFSF has already added about 2pp to the government debt to GDP ratio and the EFSF’s total commitments add 1.3% of GDP to contingent liabilities. Commitments to the ESM are capped at German contributions paid in capital, which is around 0.8% of GDP. The risk to public finances from the prospects of further sovereign support for German domestic banks remains low. This is despite the upcoming bank asset quality review and stress test by the ECB and EBA and structural weaknesses, including weak earnings and some banks’ concentration of exposure to sectors such as shipping loans and the eurozone periphery. German banks have improved capitalisation and for most of them, funding conditions remain favourable. They have also been repaying capital injected by SoFFin (Financial Market Stabilisation Fund), which has no outstanding guarantees. The fiscal adjustment effort to achieve the long-term sustainability of public finance in light of the rising cost of an ageing population remains significantly lower than the EU average due to the current favourable fiscal flows. This is even after considering the coalition agreement, which includes increased pensions and early retirement for some. The shrinking of the population and work force is nevertheless a key factor in Germany's relatively low long-term potential economic growth. Moreover, these new reforms, including a country-wide minimum wage and limiting the use of temporary work contracts, could weigh on long-term economic prospects, although Fitch continues to believe potential growth between 1.25% and 1.5% is plausible. Germany has a high-value added economy with a competitive manufacturing sector and effective political, civil and social institutions. It is the primary benchmark issuer for the eurozone, which gives it significant fiscal financing flexibility. As a consequence of safe-haven capital inflows, yields are low across the curve. Germany is a significant net external creditor with one of the strongest net international investment positions in the world and a large current account surplus. RATING SENSITIVITIES The Outlook is Stable. Consequently, Fitch's sensitivity analysis does not currently anticipate developments with a high likelihood of leading to a rating change. However, future developments that could individually or collectively, result in a downgrade of the ratings include: - Re-intensification of the eurozone crisis. As the largest contributor to any eurozone rescue package, and financial sector exposure to peripheral eurozone economies, Germany remains exposed to the risks of spill-over from the sovereign debt crisis. However, Fitch believes the risk of a re-intensification of the eurozone crisis is in decline. - GGGD approaching 90% would start to put pressure on the rating, although Fitch does not view such an outcome as likely. Economic stagnation, a weakening in the underlying budgetary position, and/or further state support to the banking sector would lead to further increases in public debt over the medium term. KEY ASSUMPTIONS The ratings and Outlooks are sensitive to a number of assumptions. Fitch assumes Germany's economic growth to rise around 1.6% in 2014 and 2015 from 0.4% in 2013. This is also dependent on the soft recovery in the eurozone (Germany’s biggest export market) staying on track. Fitch assumes the gradual progress in deepening fiscal and financial integration at the eurozone level will continue, key macroeconomic imbalances within the currency union will be slowly unwound, and eurozone governments will tighten fiscal policy over the medium term. It also assumes that the risk of fragmentation of the eurozone remains low. Fitch does not expect any additional burden to German public finances from contributions to the eurozone crisis management mechanisms other than already budgeted. Fitch expects the government to implement its commitment to budget balance (structural and headline) and reducing public debt closely. We expect GGGD to ease to around 70% in 2017. Fitch also does not expect any further debt raising costs from the banking sector. Rather as the workout of nationalised institutions progresses, the sale of existing assets could reduce public debt more than projected under Fitch’s baseline. Contact: Primary Analyst Enam Ahmed Director +44 20 3530 1624 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Gergely Kiss Director +44 0203 530 1425 Committee Chairperson James McCormack Managing Director +44 20 3530 1286 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com; Christian Giesen, Frankfurt am Main, Tel: +49 69 768076 232, Email: christian.giesen@fitchratings.com. Additional information is available at www.fitchratings.com. The issuer did not participate in the rating process other than through the medium of its public disclosure. Applicable criteria, 'Sovereign Rating Criteria’ dated 13 August 2012 and 'Country Ceilings' dated 9 August 2013, are available at www.fitchratings.com. 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