January 13, 2012 / 8:21 PM / 7 years ago

S&P to cut Austria one notch, outlook negative: sources

LONDON (Reuters) - Ratings agency Standard & Poor’s will downgrade top-rated Austria by one notch with the threat of more to come, two euro zone officials told Reuters on Friday.

“It is AA-plus and outlook negative,” one source said.

The second source cited two external factors behind why S&P sees more risk in Austria than other AAA countries.

“The euro zone crisis still remains unresolved and as a very integrated economy Austria is especially affected by that, especially because Italy is its second-biggest trading partner. And the other factor is Hungary,” he said.

He added that the negative outlook meant S&P saw a 30 percent chance it will have to inflict another downgrade of Austria in 2012 or 2013.

This would be triggered if public debt surpassed 80 percent of GDP as a result of any bank recapitalizations that may be required or an economic slump. It is around 72 percent now and projected to peak at 75.5 percent in 2013.

“The magic number is government debt of 80 percent of GDP. If that happens there will be another downgrade, but if not, then not,” he said.

Ratings agencies keep a close eye on the potential for additional public support for Austrian banks, the biggest lenders in emerging Europe.

Banks’ exposure to central, eastern and southeastern Europe stood at around 225 billion euros at mid-2011, of which 57 percent was to countries that joined the European Union in 2004 and where political risk has increased of late.

In neighboring Hungary, 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’s government has also clashed with international lenders over Budapest’s policies, raising questions about prospects for forging a funding deal that could avert a market crisis.

Reporting by European bureaux; Editing by Mike Peacock

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