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Fitch Affirms Austria at 'AAA'; Outlook Stable
August 15, 2014 / 8:07 PM / 3 years ago

Fitch Affirms Austria at 'AAA'; Outlook Stable

(The following statement was released by the rating agency) LONDON, August 15 (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: Fitch expects general government gross debt (GGGD) to rise to 80% of GDP in 2014 from 74.5%, mostly due to the restructuring of Hypo Alpe Adria (HAA). This is in line with Fitch's previous expectations and excludes the debt-increasing impact from accounting changes that will be adopted across EU member states later this year. The agency believes Austria has the components of a declining debt path. The economy is growing and the budget projections are relatively favourable. The downward trajectory of GGGD improves the shock-absorbing capacity of the sovereign. Furthermore, while the debt ratio remains elevated compared with the 'AAA' median of 45.4% and 'AA' median 34.8%, it is within the range Fitch considers consistent with a 'AAA' rating for a sovereign with otherwise strong credit fundamentals. Further bank costs for the sovereign cannot be ruled out but are likely to be limited. The restructuring of HAA will likely add EUR17.8bn (5.8% of GDP) to the public debt stock and EUR4bn (1.2% of GDP) to the fiscal deficit in 2014. This will reduce the government's contingent liability by a similar amount and neutralise the impact on GGGD of further capital injections into the bank. The financial sector faces a stable but challenging operating environment in the domestic economy and most Central and Eastern European and Commonwealth of Independent States countries. Some banks have already repaid participation capital and funding conditions have been improving. The risks from the impact of the Russian/Ukraine situation are so far manageable and we expect them to remain so in our base case. The Austrian government has a relatively favourable underlying budgetary position. The headline fiscal deficit is likely to widen to 2.8% of GDP in 2014 from 1.5% last year. While this is higher than our previous expectations, the underlying deficit (ie excluding the one-off impact of HAA support) of 1.6% would remain relatively unchanged from 2013, below the EU 3% threshold and the 'AAA' median of 1.9%. The planned fiscal adjustment should be sufficient to put GGGD on a downward trajectory under our macroeconomic projections. This is despite uncertainties about some medium-term fiscal consolidation measures and the impact on public finances from the restructuring of the banking sector. 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 (4.9% in 2Q14), 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 has diminished further on the economic recovery, ECB policy and improvements in regional governance. This is also reflected by the stabilisation of peripheral sovereign rating Outlooks. We do not expect any further contributions from Austria to the eurozone crisis management mechanisms than those already budgeted. EFSF lending, bilateral loans to Greece and ESM capitalisation will have added 2.9% of GDP to the public debt stock at end-2014. Austria's ratings are 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, although the public debt will stay within the tolerance of a 'AAA' rating under our baseline projections, Austria's ability to withstand future fiscal shocks at the 'AAA' rating level has been somewhat eroded by recent stock-flow adjustments. Fitch typically considers 80%-90% (ie, within this range, not at 90%) to be the upper limit of (projected or actual) public debt/GDP compatible with retaining a 'AAA' rating, provided the ratio is then placed on a firm downward path and other fundamentals are of the highest credit quality. 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. - Significant slippage from fiscal consolidation targets could trigger negative rating action. KEY ASSUMPTIONS The ratings and Outlooks are sensitive to a number of assumptions: Fitch assumes that Austria's economic growth rate will increase to 1.3% by 2014 from 0.3% in 2013, in line with key trading partner Germany. This is weaker than the agency's previous projection of 1.6% as high frequency data suggest the growth momentum may not be as strong as previously expected. Fitch also believes estimates of long-term GDP growth potential of around 1.5% are plausible. Fitch assumes the gradual progress in deepening fiscal and financial integration at the eurozone level will continue; key economic imbalances within the currency union will be slowly unwound; and eurozone governments will tighten fiscal policy over the medium term. Fitch assumes the eurozone will avoid long-lasting deflation, such as that experienced by Japan from the 1990s. Fitch assumes the Austrian government will broadly follow its fiscal consolidation path. Under multiple fiscal rules Austria has a 'debt brake', which states the structural budget deficit should be no bigger than 0.45% of GDP from 2017. In 2013 it stood at 1.1%. The authorities are planning to meet this objective a year earlier. After peaking at around 80% of GDP in 2014/2015, GGGD over the next 10 years 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. Implementation of ESA 2010 accounting changes would cause the debt to GDP ratio to increase by 2.5pp according to the Austrian Statistical Office. There is also the possibility that Eurostat could declare KA Finanz AG (a wind-down institution with assets of EUR7.8bn or 2.4% of GDP and already 100% state-owned) as a defeasance structure based on new accounting changes, thus including it into the public sector. These accounting changes have been factored into the affirmation. However, for reasons of international comparability, Fitch's debt projections will only incorporate them when changes are implemented by all EU member states, 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 Kit Ling Yeung Analyst +44 20 3530 1527 Committee Chairperson James McCormack Managing Director +44 20 3530 1286 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: Additional information is available at Applicable criteria, 'Sovereign Rating Criteria' dated 12 August 2014 and 'Country Ceilings' dated 9 August 2013, are available at Applicable Criteria and Related Research: Sovereign Rating Criteria here Country Ceilings here Additional Disclosure Solicitation Status here ALL 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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