Full Text Of S&P Warning On AustriAAA

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Austria's 'AAA' Long-Term Rating Placed On CreditWatch Negative

  • Standard & Poor's is placing the 'AAA' long-term sovereign credit rating on the Republic of Austria on CreditWatch with negative implications. At the same time we are affirming Austria's 'A-1+' short-term sovereign credit rating.
  • The CreditWatch placement is prompted by our concerns about the potential impact on Austria of what we view as deepening political, financial, and monetary problems within the European Economic and Monetary Union.
  • Our CreditWatch review will focus on the "political", "external", and "monetary" scores we have assigned to Austria in accordance with our criteria.
  • We expect to conclude our review as soon as possible after the European summit on Dec. 9, 2011.

FRANKFURT (Standard & Poor's) Dec. 5, 2011--Standard & Poor's Ratings Services today placed the 'AAA' long-term sovereign credit ratings on the Republic of Austria on CreditWatch with negative implications. At the same time we affirmed the 'A-1+' short-term sovereign credit rating on Austria.

Our transfer & convertibility (T&C) assessment for Austria, as for all European Economic and Monetary Union (eurozone) members, is 'AAA', reflecting Standard & Poor's view that the likelihood of the European Central Bank (ECB) restricting non-sovereign access to foreign currency needed for debt service is extremely low. This reflects the full and open access to foreign currency that holders of euros enjoy and which we expect to remain the case in the future.

RATIONALE

The CreditWatch placement is prompted by our concerns about the potential impact on Austria of what we view as deepening political, financial, and monetary problems within the eurozone. To the extent that these eurozone-wide issues permanently constrain the availability of credit to the economy, Austria's economic growth outlook--and therefore the prospects for a sustained reduction of its public debt ratio--could be affected. Further, it is our opinion that the lack of progress the European policymakers have made so far in controlling the spread of the financial crisis may reflect structural weaknesses in the decision-making process within the eurozone and European Union. This, in turn, informs our view about the ability of European policymakers to take the proactive and resolute measures needed in times of financial stress. We are therefore reassessing the eurozone's record of debt-crisis management and its implications for our view on the effectiveness of policymaking in Austria.

Our CreditWatch review will focus on three areas of our criteria. (See "Sovereign Government Rating Methodology and Assumptions," published June 30, 2011.)

  • The political score. In our view, the overall consistency, predictability, and effectiveness of policy coordination among institutions within the eurozone has weakened at a time of severe ongoing fiscal and economic challenges to a degree more than we envisioned. For Austria, we believe that this environment could hamper its nascent fiscal consolidation and institutional reforms, such as the establishment of a constitutional public sector deficit limit. Specifically, we will review the policymaking environment in terms of: the predictability of its overall policy framework and its policy responses to current developments (see "Sovereign Government Rating Methodology and Assumptions," paragraph 40; all paragraph references herein are to this publication); and the effectiveness of policymaking in addressing periods of economic distress and correcting economic imbalances (paragraph 41).
  • The external score. The Austrian economy is a net debtor to the rest of the world, though for the last nine years its international investment position has been changing through continuous current account surpluses. However, recent developments and market uncertainties have increased borrowing costs for Austria. Austrian banks refinance domestic lending fully, and their Central and Eastern European operations to a large extent, by deposit takings, mitigating liquidity risk. However, weakening asset quality in Austrian banks' securities and loan portfolios, particularly in Central and Eastern European subsidiaries, could in our view increase the risk of the need for additional capital injections by the Austrian government, or similar interventions. In our view, this raises the possibility that contingent liabilities could materialize. We will review the risk of a sudden reduction of cross-border interbank lines resulting from perceptions of increasing financial-sector stress (paragraph 76). We will also review Austria's fiscal capacity (at its current rating level) to provide additional support to its national banking system should further official assistance be required.
  • The monetary score. We will review the ECB's policy settings and their impact on financial market conditions, the real economy, and ultimately Austria's creditworthiness (paragraphs 107, 117, and 118). If we were to conclude that the ECB's policy stance is unlikely to be effective in mitigating the economic and financial shocks that we believe Austria could be experiencing, we could lower this score.

CREDITWATCH

We expect to conclude our review as soon as possible after the European summit on Dec. 9, 2011.

If we change one or more scores, we could lower the long-term rating by one notch. Conversely, if the above concerns were mitigated by what we consider to be appropriate policy action, we could affirm the rating at 'AAA'.