Austria's eastern Europe exposure a risk, but not for rating
VIENNA, Nov 26 (Reuters) - Austrian banks' exposure to emerging Europe has turned from profit boon to balance sheet risk, but not to an extent that could put the Alpine country's top credit rating at risk, credit rating agency Moody's Investors Service said on Wednesday.
In its annual report on Austria, Moody's said that the absence of a domestic real estate bubble and the robust shape of the government finances would help Austria weather those risks even if debt levels temporarily increased.
Austria is rated Aaa by Moody's. Its Credit Analysis report is an update to the market and not a rating action.
"Austrian banks have built a solid business in central and eastern Europe and therefore did not got into problematic real estate and subprime assets like other banks," Moody's analyst Alexander Kockerbeck, author of the report, told Reuters.
Austrian banks are owed $290 billion by borrowers from Albania to Russia, according to the Bank for International Settlements. This is much more than what its Italian, German and French peers have lent.
Last year, those assets brought in about 43 percent of Austrian banks' profits, according to the central bank.
"Now suddenly we have the problem that central and eastern Europe could be hit relatively hard by the change of capital flows, and since almost half of the Austrian banks' profits are generated there, they now look vulnerable," Kockerbeck said.
He said Austria was particularly exposed to possible sharp economic corrections in Romania, Bulgaria and Hungary, where its banks are among the biggest and risk is highest.
Austria responded to the financial crisis in October with a 100 billion euro ($129 billion) banking stability package similar to those of other European countries. About 15 billion euros of that package are earmarked for capital injections.
But most of this money is unlikely to be lost eventually, the Moody's analyst points out.
"Widespread bank insolvencies that would undermine the strength of the government's balance sheet to the point of exerting downward pressure on its rating are seen as highly unlikely," he says in his report.
When the financial crisis started to grip emerging European countries such as Hungary in October, debt markets read this as a risk for Austria and made Austrian government debt more expensive compared to German bonds, the European benchmark.
Austrian 10-year government debt currently trades at more than 50 basis points above German bonds -- this spread has historically been in the teens or twenties. Credit default swaps on Austrian debt have also become significantly more expensive.
But this development is based more on the dynamics of the market than on fundamentals, Kockerbeck said.
"We have seen in the past an extreme convergence of spreads. But now there is risk aversion and it goes in the opposite direction," he said. "Everything that isn't the benchmark immediately gets a huge spread.
"But I don't see that Austria faces a significantly higher risk to the government finances than others," he said. ($1=0.7767 Euro) (Reporting by Boris Groendahl)
