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Rating Action:

Moody's downgrades Austria's rating to Aa1 from Aaa; stable outlook

24 Jun 2016

Frankfurt am Main, June 24, 2016 -- Moody's Investors Service has today downgraded Austria's long-term issuer and senior unsecured debt ratings to Aa1 from Aaa. Concurrently, the government's short-term rating of P-1 has been affirmed. The outlook has been changed to stable from negative.

The key drivers for the downgrade to Aa1 are:

1. The weakness in Austria's medium-term growth prospects, despite the government's efforts to address the economy's structural constraints; and

2. The challenges that low economic growth poses for a material, sustained reduction in Austria's high government debt burden over the medium term.

The stable outlook on the new rating of Aa1 reflects the rating agency's view that further downside risks are limited. Key credit metrics are expected to remain broadly aligned with Aa1 rated-peers, as the country continues to exhibit significant credit strength derived in part from (i) its large, wealthy, and well-diversified economy as well as (ii) Austria's favourable debt affordability derived from the country's strong investor base and low financing costs.

Austria's local-currency and foreign-currency deposit ceilings as well as local-currency and foreign-currency bond ceilings remain unchanged at Aaa/P-1.

A full list of affected ratings is provided towards the end of this press release.

RATINGS RATIONALE

RATIONALE FOR THE DOWNGRADE TO Aa1

The first driver for the downgrade to Aa1 is the weakness in Austria's medium-term growth prospects, despite efforts aimed at addressing some of the economy's structural constraints.

Austria has experienced a prolonged period of subdued economic growth, which impairs its resilience to economic and financial shocks. Austria's real GDP barely grew between 2012 and 2015. More importantly, medium-term growth prospects remain weak. Austria's subdued growth outlook reflects supply-side factors that constrain its growth potential, including a high tax burden on labour, a relatively low participation rate among female and older workers, and sluggish productivity growth. Labour input growth has continued to remain weak in Austria because of low labour participation and the high labour tax wedge which reduces incentives to participate. The participation rate among elderly persons (aged between 60 and 64 years) and women is low relative to peers, at just 24% and 71%, respectively. Additionally, the growth contribution from total factor productivity (TFP) growth has fallen considerably over the last decade, and TFP growth is estimated to have contributed only around 0.2 percentage points to Austria's country's potential growth in 2014 (according to the European Commission) compared to more than 1% prior to the global crisis. Moody's believes that the investment climate is likely to remain muted over the near-term, and potentially over a longer period, in part as a response to the perceived unpredictability of the government's policy response to the resolution of HETA Asset Resolution AG (HETA's senior unsecured debt backed by a deficiency guarantee from the State of Carinthia at Ca under review for upgrade).

Against the backdrop of these structural impediments, Moody's forecasts that Austria's real GDP growth will average only 1.3% over the period 2016-20, which is significantly lower than the pre-crisis average of 2.5% for the period of 1999 to 2007 and the median growth rate for Aaa-rated countries. While the forecast incorporates a likely acceleration in real GDP growth in 2016, this will primarily reflect temporary effects. Once those effects unwind, growth is expected to weaken again and Moody's expects it will measure just 1.1% p.a. from 2019 onwards in the absence of further and more pronounced growth-enhancing structural economic reforms.

Notwithstanding the magnitude of Austria's economic and fiscal challenges, the institutional response has been slow and incremental, essentially consisting of a series of small positive steps that have been insufficient to overcome the country's growth weakness and regain some of the fiscal space lost during the global crisis. Although the government has implemented some structural reforms in the areas of health, pensions and taxes, Moody's does not believe that the measures announced to date will meaningfully raise Austria's growth potential over the medium term. For instance, while the recent tax reform may stimulate consumption and investment this year and next, it will likely lower the overall burden on labour (taxes plus social security contributions) only modestly and is unlikely to have a long-lasting impact on growth.

Looking ahead, political dynamics are likely to continue to constrain the country's ability to deploy a broader, more effective reform agenda in the coming years. Within the context of Moody's sovereign rating methodology, a government's institutional willingness and ability to reverse the impact of shocks on the public finances is an important attribute associated with the very highest rating level. While Moody's assessment of the quality of Austria's institutions remains very high, the rating agency does not believe that the country's institutional strength is on a par with that of the most highly-rated sovereigns.

The second driver for the downgrade to Aa1 is the challenge that low economic growth poses for a material reduction in Austria's high government debt burden over the rating horizon. Austria's government-debt-to-GDP ratio rose from roughly 65% to around 86% between 2007 and 2015, which positions the country's debt burden well above the Aaa-median of 38% of GDP in 2015. While the increase in debt has peaked and has begun to reverse, Austria's weak growth prospects will undermine the government's ability to reduce its debt burden materially. Hence, Moody's expects the debt-to-GDP ratio to remain well above the Aaa median for the foreseeable future, with a very gradual improvement of the debt burden at best. As a result, the Austrian government is not expected to regain the fiscal space it lost during the global financial crisis over the rating horizon of the next 3-5 years.

RATIONALE FOR MOVING THE OUTLOOK TO STABLE

The stable outlook on Austria's Aa1 rating reflects Moody's view that further downside risks to the country's credit profile are limited, with expected trends in key credit metrics, and institutional and structural features remaining aligned with Aa1 medians.

Austria's credit profile remains supported by significant credit strengths, including: (i) a large, wealthy and well-diversified economy with high GDP per-capita and a relatively low unemployment rate, as well as (ii) favourable debt affordability, which benefits from a strong investor base and low financing costs. The economy does not exhibit major macroeconomic imbalances, and corporate and household sector leverage is low in comparison to its peers, which reduces significantly its susceptibility to shocks.

On the fiscal side, despite the rise in indebtedness, debt affordability - as measured by interest payments as a percentage of either GDP or government revenues - remains high. Indeed, Austria has continued to benefit from historically low government bond yields, which have consequently kept Austria's elevated debt burden very affordable. In 2015 Austria's interest payments accounted for just 4.7% of government revenues, which is lower than the 6.6% ratio posted in 2007 but still higher than the median of 3.4% for Moody's Aa1-rated sovereigns.

WHAT COULD MOVE THE RATING UP/DOWN

Austria's Aa1 government bond rating could be downgraded were medium-term growth prospects to weaken further, particularly should that cause Moody's to conclude that the downward trajectory in the government's debt burden was likely to reverse.

Conversely, Austria's Aa1 government bond rating could come under upward pressure should medium-term economic growth outperform the rating agency's expectations, particularly should this result from successful implementation of economic reforms that address some of the structural constraints identified. Further fiscal measures implemented through the government's medium-term budget plan which increase the prospects of a higher-than-expected decline in Austria's debt burden over the remainder of this decade would also be positive for the rating.

LIST OF AFFECTED RATINGS

Downgrades:

..Issuer: Austria, Government of

.... LT Issuer Rating, Downgraded to Aa1 from Aaa

....Senior Unsecured MTN , Downgraded to (P)Aa1 from (P)Aaa

....Senior Unsecured Regular Bond/Debenture, Downgraded to Aa1 from Aaa

Affirmations:

.... Commercial Paper, Affirmed P-1

....Other Short Term, Affirmed (P)P-1

Outlook Actions:

....Outlook, Changed To Stable From Negative

GDP per capita (PPP basis, US$): 47,250 (2015 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 0.9% (2015 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 1.2% (2015 Actual)

Gen. Gov. Financial Balance/GDP: -1.2% (2015 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: 2.7% (2015 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 21 June 2016, a rating committee was called to discuss the rating of the Austria, Government of. The main points raised during the discussion were: The issuer's economic fundamentals, including its economic strength, have materially decreased. The issuer's institutional strength/framework, have decreased. The issuer's fiscal or financial strength, including its debt profile, has materially decreased. The issuer's susceptibility to event risks has not materially changed.

The principal methodology used in these ratings was Sovereign Bond Ratings published in December 2015. Please see the Ratings 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.

Sebastian Becker
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
SUBSCRIBERS: 44 20 7772 5454

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

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

Moody's downgrades Austria's rating to Aa1 from Aaa; stable outlook
No Related Data.
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