A multiple
downgrade of sovereign ratings by Standard & Poor's (S&P) has also
reached Austria after the country had been put on the watchlist on December
6, 2011.
Austria was downgraded to AA+ from AAA on Friday with the negative outlook
remaining.
S&P gave these reasons for the downgrade:
- We are
lowering the long-term sovereign credit rating on the Republic of
Austria to 'AA+' from 'AAA'. At the same time, we are affirming
Austria's 'A-1+' short-term sovereign credit rating.
- The
downgrade reflects our opinion of the impact of deepening political,
financial, and monetary problems within the European Economic and
Monetary Union (eurozone), with which Austria is closely integrated.
- The
outlook on the long-term rating is negative.
FRANKFURT
(Standard & Poor's) Jan. 13, 2012--Standard & Poor's Ratings Services
today lowered the long-term sovereign credit ratings on the Republic of
Austria to 'AA+' from 'AAA'. We removed the ratings from CreditWatch, where
they were placed with negative implications on Dec. 5, 2011. At the same
time, we affirmed the short-term sovereign credit rating on Austria at
'A-1+'. The outlook on the long-term rating is negative. Our transfer and
convertibility (T&C) assessment for Austria, as for all eurozone members,
is 'AAA', reflecting Standard & Poor's view that the likelihood of the
European Central Bank restricting nonsovereign access to foreign currency
needed for debt service is extremely low.
This reflects
the full and open access to foreign currency that holders of euro currently
enjoy and which we expect to remain the case in the foreseeable future. The
outcomes from the EU summit on Dec. 9, 2011, and subsequent statements from
policymakers lead us to believe that the agreement reached has not produced a
breakthrough of sufficient size and scope to fully address the eurozone's
financial problems.
In our
opinion, the political agreement does not supply sufficient additional
resources or operational flexibility to bolster European rescue operations,
or extend enough support for those eurozone sovereigns subjected to heightened
market pressures. We also believe that the agreement is predicated on only a
partial recognition of the source of the crisis: that the current financial
turmoil stems primarily from fiscal profligacy at the periphery of the
eurozone. In our view, however, the financial problems facing the eurozone
are as much a consequence of rising external imbalances and divergences in
competitiveness between the eurozone's core and the so-called
"periphery".
As such, we
believe that a reform process based on a pillar of fiscal austerity alone
risks becoming self-defeating, as domestic demand falls in line with
consumers' rising concerns about job security and disposable incomes, eroding
national tax revenues. Accordingly, in line with our published sovereign criteria,
we have adjusted downward the political score we assign to the Austria (see
"Sovereign
Government Rating Methodology And Assumptions," published on June
30, 2011). This is a reflection of our view that the effectiveness,
stability, and predictability of European policymaking and political
institutions (with which Austria is closely integrated) have not been as
strong as we believe are called for by the severity of a broadening and
deepening financial crisis in the eurozone.
The ratings on
Austria continue to reflect our view of its stable governance and predictable
economic policies, which remain hallmarks of Austrian politics. We view
Austria's economy as wealthy, diversified, and highly competitive. 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.
This is
provided the eurozone environment does not deteriorate such that it hampers
this goal. Austria, though still a net debtor on its external position, has
reported what we consider sound current account surpluses over the last 10
years, gradually improving its debtor position. In our opinion, contingent
liabilities are moderate and stem primarily from the banking industry's
exposure to Central and Eastern Europe.
In our view,
Austrian banks' balance sheets could suffer from negative developments in major
trading and outward direct investment partners (such as Italy and Hungary).
In this instance, the banks could require additional government support.
Furthermore, if economic growth is much weaker than we expect, this could
undermine the government's attempts to consolidate its budgets, and could
also render structural reforms ineffective. The outlook on the long-term
rating on Austria is negative, indicating that we believe that there is at
least a one-in-three chance that we could lower the rating further in 2012 or
2013. We may lower the rating if we come to believe that:
- The
weakening of Austrian banks' balance sheets stemming from negative
developments in major trading and outward direct investment partners
meant that the Austrian government needed to recapitalize the banks.
This could in turn lead to net general government debt rising above 80%
of GDP, and could also further increase contingent liabilities; and/or
- Economic
growth is much weaker than we currently expect. This could undermine the
government's attempts to consolidate its budgets, and could also render
structural reforms ineffective. This could lead to an increase in net
general government debt beyond 80% of GDP.
The ratings
could stabilize at the current level if the risks from the banking sector
remained contained, and if Austria were to enter into a more-ambitious
consolidation phase by implementing structural reforms, without damaging
economic growth prospects and competitiveness. In our view, such
consolidation measures would likely enable Austria to structurally balance
its accounts and decrease its net general government debt.
And here is
the distillate from the release concerning 16 of the 17 Eurozone members:
Today's rating
actions are primarily driven by our assessment that the policy initiatives
that have been taken by European policymakers in recent weeks may be
insufficient to fully address ongoing systemic stresses in the Eurozone. In
our view, these stresses include:
- tightening
credit conditions,
- an increase
in risk premiums for a widening group of eurozone issuers,
- a
simultaneous attempt to delever by governments and households,
- weakening
economic growth prospects, and
- an open and
prolonged dispute among European policymakers over the proper approach
to address challenges.
Find the
complete statement at the end of this post.
Politicians of all colours (with the notable exception the Piratenpartei) and
the tabloid press were quick to damn the downgrade as a political attack,
verifying the fact that international finance is still a book with seven
seals to them. A joint statement from chancellor Werner Faymann and vice
chancellor Michael Spindelegger lambasted S&P for its move after both
Moody's and Fitch had confirmed their Austrian AAA rating a few weeks
earlier.
While I remain most critical of the opaque rating process of the rating
agencies I am even more critical of the whining posture of Austria's
politicians who act as if this overdue downgrade - that will very likely be
repeated in the near future due to the chaos in the Eurozone - is
unjustified.
As a reminder: Austrian government debt stands currently at €218 billion or 76% of
GDP and races higher because the ruling coalition officially attempts to come
up with a €3 billion to €10 billion budget cuts package by end of February
while it cannot even agree on €250 million savings on the state level of the
republic. I bet everybody a troy ounce of gold that there will be no
multi-billion austerity package by the end of February.
Statements by the government and central bank governor Ewald Nowotny, who
called the downgrade incomprehensible, are unrealistic in the light of
S&P's warning from December 6 and the ensuing non-action by Austria's
government.
Unofficial mumblings that markets should not take the downgrade too serious
are actually a call to break the law: Bond fund managers are tightly
restricted by investment fund laws that oblige them to observe the ratings of
the three major rating agencies.
Nevertheless I agree with governor Nowotny that the downgrades were a
politically motivated action by S&P which is owned by McGrawHill. I was
not able to find out who is the majority owner of this company that has so
far failed to downgrade the USA despite its much higher level of debt that
already stands at more than 100% of US GDP. The rating agencies also veil
their rating process in secrecy and I am still waiting for the math behind a
one-step downgrade.
A look at Austria's yield differential to its peer Germany shows that spreads
have risen dramatically over the past months. Austria used to pay a spread of
30 to 40 basis points 'liquidity premium' for almost two decades. This has
changed dramatically: 10-year government bonds now yield around 3.60% vs.
Germany's 1.90%, showing that markets assess Austria by now much worse than
Germany.
Markets are, as always, most correct in their evaluation of Austrian debt:
Members of parliament and the government waste time haggling about changes in
the national hymn while not addressing the key obstacles of the future that
are:
- a huge
pension problem as demographics change (what a surprise for politicians:
we all become older),
- a growing
budget deficit due to a still growing public sector, and
- huge
problems of several Austrian banks who recolonised Eastern Europe and
now face billions in loans in default.
The
concernment in the Eurozone about the downgrade 'shock' proves once more that
while EU politicians are never shy of trying to cut corners to their
advantage they lack creative ideas to save the Eurozone from rapid
disintegration.
Here my tongue-in-cheek solution:
McGrawHill is currently valued at billion. It would have been a lot cheaper
to buy McGrawHill and gag its subsidiary S&P. These billions would have
brought ownership of a flourishing publishing company. Now this money will
end up in the coffers of JP Morgan, Goldman Sachs et al who can borrow
trillions from the Federal Reserve for next to nothing and buy up higher
yielding European government debt.
This is a currency war and the Eurozone is on the way to lose it.
Here is the complete S&aP statement on the rating actions concerning 16
of the 17 Eurozone member countries:
