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Rating Action:

Moody's affirms Germany's Aaa ratings; maintains stable outlook

25 Jan 2019

Frankfurt am Main, January 25, 2019 -- Moody's Investors Service ("Moody's") has today affirmed Germany's Aaa long-term issuer rating. Concurrently, the government's senior unsecured rating has also been affirmed at Aaa. The outlook remains stable.

The affirmation of Germany's Aaa ratings is based on the following key rating drivers:

(1) Germany's very high economic strength, supported by the country's very large and highly competitive economy characterized by a high degree of diversification and flexibility, which generates a very high per capita income. Economic trend growth is, however, relatively low and volatile compared to Aaa-rated peers. Potential growth will be weighed down by unfavorable demographic trends as population ageing up to 2030 will be one of the strongest globally.

(2) The very high institutional strength of Germany, underpinned by its robust and transparent institutions and the country's strong track record of stability-oriented macroeconomic policies. Highly capable institutions and Germany's safe haven status also mitigate, overall, Germany's susceptibility to shocks.

(3) Germany's very high fiscal strength is supported by its strong public finance and sound fiscal framework. The government continuously posted fiscal surpluses in each year between 2014 and 2018 and the debt-to-GDP ratio fell rapidly to 60% of GDP at end-2018, down from the peak of 81% at end-2010. Maintenance of current fiscal policy stance is expected to yield further reductions in indebtedness over the coming years. Funding costs of Germany are very low and ensure that debt is very affordable.

The stable outlook on Germany's Aaa rating reflects Moody's view that downside risks to Germany's exceptional credit profile are mitigated by its very high economic strength and competitiveness, very favorable fiscal metrics, and the capacity of the country's institutions to manage shocks and address long-term challenges, including rising demographic pressures.

Germany's long-term country ceilings for local and foreign currency bond and bank deposits remain unchanged at Aaa. Its short-term country ceilings for foreign-currency bonds and bank deposits remain unchanged at Prime-1 (P-1).

In a related rating action, Moody's has today affirmed FMS Wertmanagement's (FMS-WM) Aaa long-term issuer rating. Concurrently, FMS-WM's senior unsecured, senior unsecured medium-term note (MTN) program and senior unsecured shelf rating have also been affirmed at Aaa, (P)Aaa and (P)Aaa, respectively. FMS-WM's short-term issuer rating, commercial paper program rating, deposit note/CD program rating and the other short-term rating have been affirmed at Prime-1, Prime-1, Prime-1 and (P)Prime-1, respectively. The outlook remains stable.

FMS-WM is a resolution agency or "bad bank" scheme for 100% state-owned Hypo Real Estate Group, which was created under the Financial Market Stabilisation legislation in Germany. FMS-WM is rated on par with the German sovereign because of a loss compensation obligation from the Financial Market Stabilisation Fund vis-à-vis FMS-WM, which is ultimately an obligation of the German sovereign.

RATINGS RATIONALE

RATIONALE FOR THE AFFIRMATION OF THE Aaa RATING

FIRST DRIVER: GERMANY'S VERY LARGE, WEALTHY AND HIGHLY COMPETITIVE ECONOMY

Germany's economy is the largest in the EU and the fourth largest globally, with nominal GDP of around $4.0 trillion or 4.7% of global GDP in 2018, after the United States (Aaa stable), China (A1 stable) and Japan (A1 stable). The economy is characterized by a high degree of diversification and flexibility which generates a high per capita income of $ 52,897 that is broadly aligned with the median of Aaa-rated countries. Germany compares very favourably with Aaa-rated peers in terms of competitiveness. Germany shows also an overall strong performance in indicators measuring the innovation capacity and human capital when compared with Aaa-rated countries. Moreover, the German economy benefits from a high diversification of external demand by country and by goods which makes it less vulnerable to regional or industry specific shocks.

That said, Germany's trend growth was relatively low compared with the median of Aaa-rated peers (on average 1.6% per year vs. 2.1% from 2013 to 2022F). Moreover, GDP growth showed relatively high levels of volatility from 2008 to 2017 which mirrors the economy's high level of openness. German potential growth will begin facing some headwinds starting in the middle of the next decade because of unfavorable demographic trends as population ageing will be one of the fastest globally. The new immigration law, which could come into force at the start of 2020, is expected to soften somewhat the impact of these demographic challenges.

SECOND DRIVER: VERY HIGH INSTITUTIONAL STRENGTH THAT ALSO MITIGATES THE COUNTRY'S SUSCEPTIBILITY TO EVENT RISKS

Moody's assesses the institutional strength of Germany as very high based on the Worldwide Governance Indicators as well as Moody's own assessment of policy credibility and effectiveness. German institutions are robust and transparent, and the country has a strong track record of stability-oriented macroeconomic policies. It has demonstrated its high shock-absorption capacity and its ability to reverse debt trends on several occasions over the past decades: during the economically challenging period of German unification; throughout the low-growth environment of the early 2000s; and during the more recent global financial crisis and the euro area debt crisis.

Institutional strength is reflected in Germany's commitment to fiscal consolidation throughout the euro area debt crisis, as demonstrated by its compliance with European fiscal rules and its self-imposed "debt brake" rule. Germany's public finances are subject to and safeguarded by a number of national and European rules. Compliance with fiscal rules is monitored by the Stability Council, which is supported by independent experts.

Highly capable institutions and Germany's safe haven status also mitigate Germany's overall susceptibility to event risks which is informed by the rating agency's assessment of low banking sector risks. Germany's safe haven status supports already very low government liquidity risks. Furthermore, the country's very high international investment position and the large current account surplus lead to very low external vulnerability risks.

THIRD DRIVER: VERY STRONG PUBLIC FINANCES OF FISCAL SURPLUSES AND RAPIDLY FALLING DEBT-TO-GDP RATIO

Moody's assesses Germany's fiscal strength as very high because of its strong public finances and sound fiscal framework. Germany's fiscal surplus increased to a record high of 1.7% of GDP in 2018, up from 1.0% of GDP in 2017. We expect fiscal surpluses of 1.2% in 2019, 0.7% in 2020 and on average 0.2% in 2021/22. The narrowing of the surplus reflects the slowing economy and the fiscal measures of the grand coalition, which include some additional measures to support social policies, some tax relief and other initiatives. The reserves of the social security systems also increased further in 2018 from already elevated levels.

Fiscal surpluses and healthy growth in recent years resulted in a rapid fall of the general government's debt-to-GDP ratio to about 60% of GDP in 2018. Moody's expects the ratio to decline further to 57% in 2019, which will contribute to an overall drop of close to 18 percentage points over a five year period. Moody's expects that this downward trend will continue in the coming years given the anticipated budgetary performance, despite slowing growth.

Germany's debt affordability remains very affordable, as reflected in both its low interest payments to GDP ratio, at 0.9%, and very low interest payments to revenue ratio, which stood at 2.0% in 2018. Both debt affordability indices have improved significantly since the start of the financial crisis as a consequence of safe haven flows and a very expansionary monetary policy pushing down German interest rates being currently in negative territory up to a duration of seven years and less. Moody's expects debt affordability indices to improve further through 2019 due to an only gradual tightening of monetary policy by the ECB and the ability of the government to refinance debt at rates still lower than the coupons on its maturing bonds.

While Germany's current fiscal position shows an exceptional strength, rising demographic trends will pose a challenge in the medium to long term, mainly due to lower potential growth and increased spending on pensions and healthcare.

RATIONALE FOR STABLE OUTLOOK

The stable outlook on Germany's Aaa rating reflects Moody's view that downside risks to Germany's exceptional credit profile are mitigated by its very high economic strength and competitiveness, very favorable fiscal metrics, and the capacity of the country's institutions to manage shocks and address long-term challenges, including rising demographic pressures.

WHAT COULD CHANGE THE RATING DOWN

Germany's Aaa government bond rating would come under downward pressure if Moody's were to observe a material and prolonged deterioration in its economic strength which could potentially result from a failure to address rising demographic challenges or from competitive pressure, in particular the automotive sector, caused by new competitors, environmental regulation and technological change gradually eroding the strength of Germany's sizeable industrial base. Additionally, the rating could also come under pressure in the event of a sharp increase in the government debt burden unlikely to be reversed.

Separately, a significant rise in the risk of euro area fragmentation, in particular if such risk were prompted by events in a core euro area country, would be credit negative for all euro area member countries and would also exert pressure on the rating of Germany.

GDP per capita (PPP basis, US$): 50,804 (2017 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 2.2% (2017 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 1.7% (2017 Actual)

Gen. Gov. Financial Balance/GDP: 1.0% (2017 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: 8.0% (2017 Actual) (also known as External Balance)

External debt/GDP: [not available]

Level of economic development: Very High level of economic resilience

Default history: No default events (on bonds or loans) have been recorded since 1983.

On 22 January 2019, a rating committee was called to discuss the rating of Germany, Government of. The main points raised during the discussion were: The issuer's economic, institutional, fiscal or financial strengths and susceptibility to event risks have not materially changed.

The principal methodology used in these ratings was Sovereign Bond Ratings published in November 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Heiko Peters
Asst Vice President - Analyst
Sovereign Risk Group
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Yves Lemay
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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