Austria’s AAA rating confirmed

An influential rating agency has warned Austria about its high state debt.

Fitch announced yesterday evening (Mon) Austria needed to act more ambitiously against its steadily increasing high debt rate. The agency claimed the Alpine country would be better protected against economic setbacks in the future if it started to get active now. Austria’s debts resemble around 73 per cent of the country’s gross domestic product (GDP). Several other Eurozone members like Luxembourg (18 per cent) and Finland (48 per cent) do significantly better than the country governed by a coalition of Social Democrats (SPÖ) and the Austrian People’s Party (ÖVP).

Fitch pointed out the SPÖ-ÖVP administration experienced few difficulties in establishing a state budget for 2011 because of the surprisingly quick recovery of the domestic industry. The credit rating company stressed the Austrian industry was likely to grow further in the coming years. It added that the outlook for the Austrian economy was stable.

The agency also said concerns Austria’s financial stability may be weakened by the strong engagements of the country’s banks in Central and Eastern Europe (CEE) were non-existent anymore. Fitch – who reiterated Austria’s best possible rating (AAA) – explained the banks managed to achieve profits when the economy in CEE and Eastern Europe (EE) recuperated from the shockwaves of the recession.

Famous economist Paul Krugman caused a stir in April 2009 when he claimed Austria faced the highest risk of suffering a national bankruptcy after Iceland and Ireland. He argued Austria’s situation was volatile due to the large amount of credits to EE states. Josef Pröll, who headed the ÖVP and acted as Austrian finance minister at that time, hit back by branding Krugman’s estimations as “unqualified and simply wrong.”

Meanwhile, Austria’s leading economic think tanks said the domestic economy would grow by three per cent this year compared to 2010. The Institute for Advanced Studies (IHS) and the Institute for Economic Research (WIFO) agreed about 2011 in their most recent outlook presented earlier this month. However, while IHS said the GDP would soar by another 2.1 per cent in 2012, WIFO research came up with an improvement of only 1.8 per cent.

The Austrian economy shrank by 3.9 per cent from 2008 to 2009 before a 2.1 per cent GDP increase was achieved last year. The domestic economy did better than most of the European Union’s (EU) other 26 member nations, according to international analysts. The SPÖ-ÖVP coalition’s decision to financially support firms which put staff on short time instead of laying them off despite fewer orders has received wide acclaim. Opinion leaders said the Austrian labour scheme was a role model for other countries. Fewer than five per cent of Austrians are currently out of work. The country has managed to keep the unemployment rate at a comparably low level throughout the crisis.

Fitch’s appeals to show more effort in cutting the state debt burden comes a few weeks after Moody’s, another influential rating agency, expressed similar suggestions. Moody’s said in June it decided to confirm Austria’s AAA rating owing to the state’s great financial strength. However, the agency urged the government to act over the budget deficit and the debt rate. Moody’s added risks created by Austrian banks’ high activity in CEE were controllable.

Meanwhile, SPÖ boss Werner Faymann has vowed to keep calling for the creation of a European credit rating agency. The chancellor said a new rating agency organised and supervised by European financial authorities would diminish the influence of the world’s big three, Fitch, Moody’s and Standard & Poor’s (S&P). The agencies came under fire for downgrading the rating of economically challenged Eurozone members like Greece and Portugal several times in the past months despite European agreement about financial support for the countries.

Asked for her opinion on the issue, Siemens board member and ex-SPÖ official Brigitte Ederer said she had been in favour of the idea of a European agency “for many years.” Ederer criticised the leading trio’s “dominance.” She added: “We should stand for European interests. These interests are not represented by the currently operating agencies.”

Austrian National Bank (OeNB) Governor Ewald Nowotny claimed the three leading agencies apparently acted “much stricter and more aggressively” about European concerns in contrast to “similar cases in South America.”

The agencies defended their decisions, arguing that their procedures were fully transparent.