8/3/2019 Change in Rating of Austria

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Erste Group ResearchShort note | Fixed Income | Austria16 January 2012 

Change in Rating of AustriaS&P lowers Austria’s rating by one notch from AAA to AA+

Analysts:

Gudrun Eggergudrun.egger@erstegroup.com 

Adrian Beckadrian.beck@erstegroup.com 

On December 5, rating agency Standard and Poor’s placed the long-term

triple-A rating of Austria and all other triple-A counties of the Eurozone on‘CreditWatch with negative implications’. This was justified by concernsabout the deepening political, financial and monetary problems within theEU and Eurozone. Eventually, Austria was downgraded by S&P fromAAA to AA+ with negative outlook on January 13. At the same time, theshort-term country rating (A-1+) was confirmed and the stable governanceand predictable economic policy, as well as the robust economy itself, werehighlighted. Contingent liabilities are described as moderate.

Overall, last Friday, S&P downgraded nine Eurozone countries. Thereasoning of the rating agency is based on the impact of deepeningpolitical, financial and monetary problems within the Eurozone and thewhole EU. It is especially criticized that the EU summit did not ‘produce abreakthrough’ and thus did not bolster the rescue operations orsufficiently support countries suffering the worst of the debt crisis.

S&P furthermore emphasized that budgetary discipline is not the onlyreason for the current crisis, but also the rising external imbalances aswell as divergences in competitiveness within the Eurozone. Thus, itcriticizes the reform process, which is mainly based on budgetconsolidation.

That domestic banks might suffer from the negative developments in Italyand Hungary is evaluated as a further risk for Austria. If economic growthturns out lower than currently expected, it could undermine theconsolidation of the budget and/or lead to a delay of structural reforms.

On the basis of the latter arguments, which could result in an increase ofAustria’s gross debt to above 80% of GDP, S&P also justified the negativeoutlook of the Austrian rating, which implies a probability of at least onethird for a further downgrade in the course of 2012 and 2013. Stabilizationof the rating is contingent on these risks remaining under control.

Both of the other two important rating agencies (Moody’s and Fitch)assess Austria with triple-A with stable outlook. Moody’s recentlyappreciated Austria’s efforts in consolidating the budget and limiting CEEexposure. Concerning this matter, a meeting with representatives of thegovernment, the National Bank and the financial market authority isscheduled for today.

Yields spreads of Austrian 10Y government bonds already increasedsignificantly in November (ahead of the S&P report of 5.12.) to record levels

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Erste Group ResearchShort note | Fixed Income | Austria16 January 2012 

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(>180bp), but have slightly decreased since then. This is also partly due tomeasures announced by the government and the Austrian National Bank(e.g., the debt brake or additional capital buffer for banks). The reaction tothe actual downgrade was limited (10-15bp).

We are still convinced that the strong and balanced economicstructure of Austria, in combination with moderate new borrowing,constitute important advantages. In the past 10 years, economicgrowth in Austria was above average and we still expect growth ratesabove the average of the Eurozone. Austria’s current account hasbeen positive since 2002, which reflects its internationalcompetitiveness. GDP per capita is near the top and unemployment iscurrently the lowest within the Eurozone (4.0%). In light of the highwealth, additional consolidation measures by the government shouldnot be threatened. However, the pace regarding structural reforms andpolitical decisions (as well as in the whole Eurozone) should rise, inour opinion, in order to counteract further downgrades.

This research report was prepared by Erste Group Bank AG (”Erste Group”) or its affiliate named herein. The individual(s) involved in the preparation of the report were at the relevant timeemployed in Erste Group or any of its affiliates. The report was prepared for Erste Group clients. The information herein has been obtained from, and any opinions herein are based upon,sources believed reliable, but we do not represent that it is accurate or complete and it should not be relied upon as such. All opinions, forecasts and estimates herein reflect our judgment onthe date of this report and are subject to change without notice. The report is not intended to be an offer, or the solicitation of any offer, to buy or sell the securities referred to herein. From timeto time, Erste Group or its affiliates or the principals or employees of Erste Group or its affiliates may have a position in the securities referred to herein or hold options, warrants or rights withrespect thereto or other securities of such issuers and may make a market or otherwise act as principal in transactions in any of these securities. Erste Group or its affiliates or the principals oremployees of Erste Group or its affiliates may from time to time provide investment banking or consulting services to or serve as a director of a company being reported on herein. Furtherinformation on the securities referred to herein may be obtained from Erste Group upon request. Past performance is not necessarily indicative for future results and transactions in securities,options or futures can be considered risky. Not all transactions are suitable for every investor. Investors should consult their advisor, to make sure that the planned investment fits into theirneeds and preferences and that the involved risks are fully understood. This document may not be reproduced, distributed or published without the prior consent of Erste Group. Erste GroupBank AG confirms that it has approved any investment advertisements contained in this material. Erste Group Bank AG is regulated by the Financial Market Authority (FMA) Otto-Wagner-Platz5,1090 Vienna, and for the conduct of investment business in the UK by the Financial Services Authority (FSA).

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