February 21, 2014 / 5:06 AM / in 4 years

Fitch Affirms Austria at 'AAA'; Outlook Stable

LONDON, February 21 (Fitch) Fitch Ratings has affirmed Austria's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'AAA' with Stable Outlooks. The issue ratings on Austria'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 reflects the following factors: The restructuring of Hypo Alpe Adria (HAA), a nationalised bank, will likely cause gross general government debt (GGGD) to rise more than previously expected by Fitch. While there are still a number of options, the government has yet to disclose its preferred solution, raising concerns about policy coherence and credibility in the near term. Fitch's public debt projections are based on the conservative assumption that the government absorbs HAA's total assets with the effect of raising GGGD by EUR18bn (5.6% of GDP) in 2014. This will also reduce the government's contingent liabilities by a similar amount and neutralise the impact on GGGD of further capital injections into the bank. Further bank costs for the sovereign will be limited. The banking sector in general continues to face a broadly stable but challenging operating environment domestically and externally, given its heavy exposure to Central and Eastern European and Commonwealth of Independent States countries. Some banks have started to repay participation capital and funding conditions have been improving. Nevertheless, further capital transfers to other nationalised medium-sized banks cannot be ruled out, although they would be small. Despite the one-off stock-flow adjustments to GGGD related to financial sector support, Fitch believes that Austria's relatively favourable public debt dynamics, including stronger growth and low fiscal deficits, should remain intact. Fitch expects the general government debt ratio (GGGD) to peak close to 80% in 2014/2015 from a little over 74% in 2013. While the debt ratio remains elevated compared with the 'AAA' median of 46.7%, it is within the range Fitch considers consistent with a 'AAA' rating The Austrian government has a relatively favourable budgetary position with the headline and primary fiscal balance better than the 'AAA' median. The fiscal outturn in 2013 is estimated to be around 1.6% of GDP, which is also better than previously expected by Fitch. Planned fiscal adjustment should be sufficient to put GGGD on a downward trajectory. Despite uncertainties about some medium-term fiscal consolidation measures, the impact on public finances from the restructuring of HAA and the new coalition agreement, we continue to expect the government to adhere to its 'debt brake' of a structural deficit no bigger than 0.45% of GDP from 2017 onwards from around 1.4% in 2013. Prudent macroeconomic management, an absence of major imbalances and strong international competitiveness imply that the Austrian economy should continue to outperform the eurozone average. Austria has the lowest unemployment rate in the EU, although it is elevated by domestic experience, the private sector is moderately leveraged and the current account has been in surplus since 2002. The risk from contingent liabilities from the eurozone crisis is easing with improved regional governance, economic recovery and ECB policy. We do not expect any further contributions from Austria to the eurozone crisis management mechanisms than those already budgeted. Further contributions to the EFSF and ESM this year will push up the cumulative contributions to EU stabilisation measures to 2.9% of GDP from 2.7% in 2013. Austria's ratings are also underpinned by a diversified open economy with high GDP per capita. The strong institutional framework fosters confidence in its ability to honour its public-debt commitments. 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 include: - Further material costs from the financial sector that worsen the government debt profile, for example in the context of the ECB's forthcoming Comprehensive Assessment, would trigger a negative rating action. - Significant slippage from fiscal consolidation targets could also trigger a negative rating action. Insufficient discipline in local budgets or a failure to implement expenditure cuts, as yet unspecified in the consolidation programme, would put pressure on the rating. KEY ASSUMPTIONS The ratings and Outlooks are sensitive to a number of assumptions: Fitch assumes that Austria's economic growth rate will increase to 1.6% by 2014 from 0.4% in 2013, in line with key trading partner Germany. This is also dependent on the soft recovery in the eurozone 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 assumes the Austrian government will broadly follow its fiscal consolidation path. In total, the authorities expect that fiscal savings will reach EUR27.8bn by 2016. Spending cuts account for two-thirds of the adjustment, with the bulk coming in 2015 and 2016. After peaking at close to 80% of GDP in 2014/2015 over the next 10 years the GGGD is projected to decline faster than the EU recommendation that the excess over 60% of GDP should be reduced by 1/20th per year on average. However, the impact of the restructuring of the financial sector remains uncertain. Implementation of ESA 2010 accounting changes would cause the debt to GDP ratio to increase by 2.5pp according to the Austrian Statistical Office. Our debt projections will take this into account when this change is implemented by all EU member states, which is expected from September 2014. Contact: Primary Analyst Enam Ahmed Director +44 20 3530 1624 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Amelie Roux Director +33 1 44 29 92 82 Committee Chairperson Paul Rawkins Senior Director +44 20 3530 1046 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available at www.fitchratings.com. Applicable criteria, 'Sovereign Rating Criteria' dated 13 August 2012 and 'Country Ceilings' dated 9 August 2013, are available at www.fitchratings.com. Applicable Criteria andALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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