S&P: Warum Osterreich?

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Months worth of instability rumors about France, Italy, and Spain left no one surprised by Friday’s corresponding S&P credit downgrades.  Yet, at least one country that has seen little attention is the formerly AAA-rated nation of Austria, which S&P downgraded to AA+.


Proof of Austria’s Strength

It doesn’t have the problems of some of its deeply troubled neighbors, so what cost Austria its AAA?  Unemployment in Austria is only 4%.  Finland stands at 7.4%, Luxembourg and The Netherlands at 4.9%, and all three maintained their AAA.  Even Germany’s unemployment rate of 5.5% is higher than Austria’s, and German not only maintained its AAA rating—it had its outlook upgraded to “Stable.”  The only other AAA-rated country to be downgraded last week is France, which has a current unemployment rate of 9.8%.


There are other signs of Austrian economic strength.  Even the official S&P statement referenced “stable governance and predictable economic policies, which remain hallmarks of Austrian politics.”  The statement goes on to supply signals of Austria’s viability, saying it views its economy as “wealthy, diversified, and highly competitive.”   Continued, S&P, “We expect the pace of fiscal consolidation will increase, which we believe could reduce fiscal deficits and debt faster than outlined in the government’s 2011 budget plan, and perhaps even in its budget for 2012.”


So, Why the Downgrade? 

A close review of the announcement finds much of S&P’s downgrade decision driven by pessimism not about Austria individually, but about all European Monetary Union(EMU) countries.  By their logic, Austria may not have been the country responsible for the ship hitting the iceberg, but it’s on board, and it’s still going down.  In fact, a full fifteen of sixteen EMU members taken off of CreditWatch were downgraded due at least in part to the overall weakness of the union.


“The downgrade is far too broad, it effects too many countries, it effects the very credibility of the Euro,” Treasury Minister Cristobal Montoro of Spain said on the radio in the wake of the news.  “It’s important that the European institutions understand that it’s time to do everything possible to build and reinforce the Euro.”


In its explanation of the Austrian downgrade, S&P cited few specific factors to substantiate a letter-rating drop.  The single caution it did mention had to do with heightened risk surrounding “major trading and outward direct investment partners” (in this case, Italy and Hungary).  Also, S&P named a benchmark for distress, one they believe Austria may be nearing.  Should Austria allow debt levels to reach 80% of GDP, said Moody’s, the agency will downgrade the nation’s credit rating again.


The Role of Italy and Hungary

Hungary is Austria’s neighbor to the south east—its economy is considered more vulnerable than Austria, a major trade partner.  From Austrian banks (Erste Bank) to supermarket chains (Spar), and a major home and furniture retailer (XXXLutz), Austria is a major investor in Hungary.  Yet Hungary’s relative weakness and a declining European landscape have cast doubt on the viability of sales revenues and investment ROIs from this region.  The worst case scenario for Austria would be a Hungarian bankruptcy, which would force it to replace Hungary’s defaulted cash.


In the case of Italy, Austria’s neighbor to the south west, extreme pessimism surrounding its own economy casts doubt on continued foreign spending with all partners, including Austria.  The S&P announcement saw Italy’s A rating slip two notches to BBB+, and its long- and short-term outlook both go negative.


Austria’s Reaction

Bernhard Felderer, head of Austria’s State Debt Commission feared the downgrade would “cost [Austria] a lot of money,” and criticized the agency’s “uneven” risk valuation of Eastern European nations.  He also expressed disappointment at S&P’s “sudden” skepticism about Austria’s debt levels, saying that Austria was never punished for maintaining similar debt levels in earlier years.  Social Democratic Chancellor Werner Faymann echoed Felderer’s sentiment, calling the downgrade “incomprehensible and wrong”.


Yet, if Austria wishes to rectify S&P’s most outspoken reservations, it must rein in debt levels that already stand at 74% of GDP.  Some Austrian politicians believe this means establishing a constitutional debt cap that aligns with the threshold S&P has named.  Such a measure would be easier said than done, given partisan conflict around a source of stabilizing funds and the public’s role in weighing in on a decision.  Internal gridlock around some of these issues parallels themes seen all across Europe, shedding light on what may be the central problem—discord and indecision.


Hope from Moody’s, Fitch, and Even S&P

Despite S&P’s recent measures, Moody’s and Fitch affirmed Austria’s AAA status in December and January, respectively, the latter confirming as much just days ago.  Neither named Austria as having its rating “under review” (which was not the case with some other nations, including France).  Yet another sign that S&P’s Austria downgrade may not carry through to the others: Moody’s remarks about Austria did not parallel those of S&P.  When it spoke of its thoughts on Austria’s stability, it made no mention of Italy or Hungary, mentioning instead rising health care costs.


Finally, though it wasn’t great news for Europe as a whole, S&P softened the blow of its overall ruling with these words:  “Ratings on the Eurozone sovereigns remain at comparatively high levels, with only three below investment grade…Historically, the  15-year cumulative default rate for sovereigns rated in investment grade was  1.02%, and 0.00% for sovereigns rated in the ‘A’ category or higher. During  this period, 97.78% of sovereigns rated ‘AAA’ at the beginning of the year  retained their rating at the end of the year,” the agency said.

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