Next rating agency set to downgrade Austria

A leading rating agency has sent shockwaves through Austria by threatening to downgrade its credit rating.

New York City-based credit rating agency Moody’s announced last night (Mon/Tues) that it decided to put Austria on negative credit watch due to great uncertainty about whether Europe will be able to solve the worsening debt crisis. The outlook on the economy of eight other European Union (EU) member countries was lowered as well. These states are now under higher risk of losing their current credit ratings within the coming two months.

France, Italy, Portugal, the United Kingdom, Spain and Slovakia are among the other countries affected by Moody’s most recent measure. Austria and France are the only two states among them with AAA ratings. The rating agency left its outlook on the economy on the Eurozone’s other AAA countries – Luxembourg, Finland and Germany – unchanged.

Moody’s confirmed the best possible estimation of Austria’s solvency and economic stability only last December. The step was succeeded by news that Standard & Poor’s (S&P) downgraded the country, which joined the EU in 1995, from AAA to AA+ due to its soaring public debt ratio, risks linked with Austrian banks’ engagement in Eastern Europe (EE) and concerns about negative effects on the Austrian economy if Italy were to go bust.

Moody’s explained yesterday that Austria’s AAA also depended on its “strong, diversified economy with no major private sector or external imbalances to correct”. The rating agency acknowledged the country’s comparably strong growth and low jobless rate – but also expressed concerns about a further increase of state debt due to expected setbacks for the European economy. Moody’s said the Austrian government of Social Democrats (SPÖ) and People’s Party (ÖVP) was unlikely to “make any material progress in reducing the fiscal deficit” due to the situation in the Eurozone.

Moody’s also expressed concerns about the functionality of the Austrian government’s most recent austerity package. SPÖ and ÖVP plan to save 26.5 billion Euros until 2016. The parties’ teams of ministers gave the go-ahead to the various measures last Friday. SPÖ Chancellor Werner Faymann and ÖVP boss Michael Spindelegger presented the planned measures later on the same day. The plan is to pass the string of draft bills linked with the fiscal consolidation package in parliament later this month and in March to make the measures effective as of 1 April.

Moody’s warned that Austria’s debt ratio might remain above 70 per cent of the gross domestic product (GDP) until 2016 despite the different cutbacks and attempts to improve the public sector’s efficiency and performance capacity. The Austrian debt was as high as 72.2 per cent of the country’s GDP last year. Moody’s said it would remain higher than 70 per cent “even assuming full implementation of all the proposed measures”.

Bank Austria (BA) chief analyst Stefan Bruckbauer told the Kurier today he was “not surprised” by Moody’s decision. Bruckbauer said the government was now forced to pass the savings package and clarify open questions to prove the credit rating agencies wrong.

SPÖ State Secretary Andreas Schieder pointed out that the package “will not be opened again” while humanitarian organisations and charity groups deplored a lack of social balance. Schieder said on TV on Sunday evening that SPÖ and ÖVP would not correct any of the measures they agreed on in the negotiations of recent weeks.