December 23, 2011 / 7:00 AM / in 6 years

UPDATE 3-Moody's keeps Austria at AAA, eyes euro zone crisis

* Maintains top rating with stable outlook

* Says outlook hinges on resolving euro zone crisis

* Cites banking sector’s exposure to emerging Europe

* Says debt crisis a credit risk for most of euro zone

By Michael Shields

VIENNA/LONDON, Dec 23 (Reuters) - Moody’s held Austria’s top sovereign rating with a stable outlook on Friday but warned the debt crisis posed a credit risk for it and most euro zone states, putting pressure on the region’s policymakers to take action.

“The longer the sovereign and bank funding markets remain volatile, the more likely it is that further credit pressures will develop for most euro area countries, including Aaa-rated (ones),” the rating agency said.

The statement from Moody‘s, which had said this month it would review the ratings of all 27 EU states in the first quarter of next year, echoed the concerns of its peers.

Standard & Poor’s warned on Dec 6. that the sovereign debt crisis could prompt it to downgrade the ratings of 15 euro zone members, including Germany, France and Austria.

Separately, two independent European government sources told Reuters on Friday that Standard & Poor’s is expected to release its eagerly awaited verdict on debt ratings for 15 euro zone countries in January.

“We have got an informal signal from Standard & Poor’s that they will come only in January,” said one of the sources who declined to be named because exchanges with the rating agency are confidential.

On Dec. 16, Fitch put six euro zone economies including Italy and Spain on watch for potential near-term downgrades, saying it thought a comprehensive solution to the euro zone’s debt crisis was beyond reach.

Policymakers struggling to reach a consensus on tackling the debt crisis are focused on a plan for tighter euro zone fiscal rules, which they hope will prevent the problems from worsening.

But the market response to a Dec. 9 EU summit at which that plan was thrashed out has been cool, due also to the European Central Bank’s reluctance to play a more interventionist role.

Moody’s said on Friday that, while Austria’s Aaa ratings were still stable, that outlook increasingly depended on a resolution of the euro zone crisis “which has begun to negatively affect core euro area member states like Austria”.

The rating agency also highlighted the risk posed by Austria’s relatively large banking sector and its exposure to central and eastern Europe.

Markets took the Austria news in their stride.

Spreads for 10-year Austrian government debt over benchmark German Bunds were little changed at around 109 basis points by 1130 GMT.


Moody’s said a substantial and prolonged deterioration of Austria’s ability to handle its debt would weigh on the rating.

“A scenario with a series of sovereign defaults and exits from the euro zone would also put pressure on Austria’s rating, as it would for other euro zone Aaa-rated sovereigns,” it said.

In reaffirming Austria’s rating, it cited the country’s economic strength, skilled labour force, competitive export sector, low unemployment and sound finances.

It “views positively the recent announcement by the government to introduce a balanced budget requirement into the constitution as well as attempts to limit the sovereign’s exposure to the banking system’s foreign operations”.

The coalition government has adopted a balanced budget law that caps the structural budget deficit at 0.35 percent of GDP from 2017 and aims to reduce national debt to 60 percent of GDP by 2020 after peaking at around 75.5 percent in 2013.

But it has struggled to find an opposition party willing to give it the two-thirds parliamentary majority it needs to anchor the law in the constitution, which would make it harder for future governments to overturn.

Finance Minister Maria Fekter said in a radio interview it was “absolutely forbidden” to ease up on efforts to improve state finances despite the positive report from Moody‘s.

“We need to pursue a long-term strategy of cutting deficits and debt and improving the quality of Austria as a location, not scaring and driving off investors,” she said.

Austrian banks’ exposure to central, eastern and southeastern Europe stood at around 225 billion euros ($294 billion) by mid-2011, of which 57 percent was to countries that joined the European Union in 2004 and where the central bank said this month “political risk has increased again of late”.

In neighbouring Hungary, for instance, banks are being saddled with big losses from the government’s decision to let borrowers repay foreign-currency loans at below-market exchange rates.

Hungarian Prime Minister Viktor Orban has also rejected a European Commission request to withdraw two disputed laws, a move which could derail Hungary’s talks about a new deal with lenders and may trigger a market crisis.

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