Austrian AAA ‘at risk’

A leading economist has warned Austria may lose its top credit rating.

Bernhard Felderer said yesterday (Weds) the alpine country’s outlook may be downgraded by the world’s leading rating agencies due to the economic turmoil in Italy. Austria has close business ties with the country which borders it in the south. Italy has been one of the most important partner of Austria’s export industry for decades. The southern state’s parliament agreed on several new laws earlier this week in a bid to get the public budget under control.

The citizens of Italy – which has one of the highest debt rates in Europe – must brace for pay cuts and lower pensions, less spending on education and science and tax increases in the coming years. Prime Minister Silvio Berlusconi is expected to resign soon due to the immense pressure coming from within the government and the federal parliament’s opposition factions. An Italian state bankruptcy could have much worse effects on the Eurozone than the troubles Greece has been in due to its size and economic impact on economies in the whole world, economists have warned.

Felderer revealed yesterday representatives of Moody’s, one of the biggest rating agencies in the world, will come to Austria in “two to three weeks” to evaluate the country’s economy. The economist made clear that the experts may lower the domestic economy’s outlook – and warned that a correction of Austria’s rating could not be ruled out.

The Austrian economy is currently given an AAA rating by Moody’s, the best-possible grade. Standard & Poor’s (S&P) consider the country’s economy as stable as Moody’s do. Fitch confirmed its triple A rating for Austria only last July but also appealed on the country’s government to show more ambition in carrying out desperately needed reforms. The agencies’ ratings describe the economic stability of countries and the trustworthiness of government bonds, banks and companies.

Felderer explained that Austrian government bonds could become less popular among international investors if Italian lawmakers failed to stabilise the country’s economy. The conservative economist, who heads the Institute for Advanced Studies (IHS) and the Austrian State Debt Commission, said such developments would confront the Austrian government coalition with higher interest rates on public debts.

Austria is just one of six Eurozone members with an AAA rating. Felderer identified Austria – which is governed by a coalition of Social Democrats (SPÖ) and the Austrian People’s Party (ÖVP) – and France as the countries most endangered by losing the top credit rating. He said Austria’s debt and budget situation would pose a significant threat.

ÖVP Finance Minister Maria Fekter admitted in her annual budget speech last month that the state debt would rise from 73.6 per cent of the gross domestic product (GDP) this year to 75.5 per cent in 2013. Fekter said she would do everything to lower it to 74.4 per cent in 2015. The former interior minister also revealed plans to reduce the budget deficit from 3.9 per cent in 2011 to two per cent in 2015. Many experts doubt that such a reduction would be possible due to the volatile economic outlook, high inflation, the inefficiency of Austria’s bureaucracy and stagnating salaries.

Fekter said that the government would spend 1.67 billion Euros more on health sector initiatives next year than in 2011. She added that investments on motorway and railroad projects would climb by 511 million Euros. The army will receive 45 million Euros more while agriculture and forestry investments would shrink by 23 million Euros. Overall, nearly 73.6 billion Euros will be spent by the state in 2012 after investments of 70.1 billion Euros in the current year.

Felderer warned yesterday that the European Financial Stability Facility (EFSF) would still not be large enough to substantially support Italy if European Union (EU) decision-makers agreed on increasing its capacity to one billion Euros. He told Die Presse that the Austrian SPÖ-ÖVP administration would be well advised to introduce a debt brake. The Kurier reported yesterday that the coalition partners eventually agreed on such a measure.

A debt brake would force the current and succeeding governments to keep the overall state debt below 60 per cent of the GDP. The EU’s financial regulations contain this percentage figure – which is currently ignored by most of its 27 members. The Austrian Audit Office (RH) and research group Statistik Austria could monitor Austria’s spending strategy to help the country get closer to meet the EU’s Maastricht criterion. The government could be allowed to order the institutions or provinces responsible for breaches of the limit to pay for possible fines by EU watchdogs if a debt brake gets introduced in the Austrian constitution.

Claus Raidl, the president of the Austrian National Bank (OeNB), recently said Austria’s debts were already around 10 per cent higher if the condition of state-owned companies like Federal Railways (ÖBB) and street and highway maintenance company Asfinag were considered. Fekter challenged his claims and declared that Austria’s AAA rating “is not endangered.” She spoke out in favour of a quick implementation of a federal debt limit. It seems that the ÖVP’s internal disputes about the issue are eventually sorted out as the party now appeals on the SPÖ for support of a draft bill about a debt brake.