Austria’s top credit rating outlook was raised to stable from negative by Moody’s Investors Service as it’s less likely the country will have to support other euro area countries or Austrian banks.
Moody’s affirmed Austria’s Aaa rating even as a state-owned “bad bank” for nationalized Hypo Alpe-Adria-Bank International AG, or HAA, may add as much as 19 billion euros ($26 billion) to the nation’s debt level, it said in a statement yesterday. That’s because the bad bank won’t trigger immediate refinancing needs and because the cost to wind it down will be lower than the asset volume, Moody’s said.
“In Moody’s view, the government’s fiscal strength will not be materially undermined by the resolution of HAA,” Moody’s analysts led by Sebastian Becker wrote. Moody’s sees a “reduced risk that the government’s balance sheet will be affected by a further significant crystallization of contingent liabilities from the domestic banking sector, beyond those expected in relation to the resolution of HAA.”
Moody’s cut Austria’s rating outlook to negative two years ago, citing risks for government support for its banking sector. Standard & Poor’s Rating Services cut its rating to AA+ from AAA in 2012.
The costs to unwind Hypo Alpe along with resurgent eastern European risks carried by Austrian lenders have renewed rating concerns. Strategists at Commerzbank AG and ING Groep NV warned earlier this month that Moody’s could cut Austria’s rating. Fitch affirmed its AAA rating with a stable outlook last week.
Investors have largely shrugged off such downgrades, reflecting a shift from reliance on ratings companies to a focus on in-house analysis. Since Austria lost its top rating at Standard & Poor’s on Jan. 13, 2012, Austrian government bonds returned almost 14 percent, according to the Bloomberg Austria Sovereign Bond Index.
The yield on Austrian 10-year bonds rose to 1.928 percent today, 30 basis points more than what Germany pays on debt of the same maturity. On the day that S&P cut its rating, the yield was at 3.065 percent, and it was 130 basis points more than the yield on German debt.
Policy makers in Austria are deciding if they should create a wind-down unit to liquidate about 19 billion euros of Hypo Alpe assets. Setting up a state-backed “bad bank” for the assets could raise government debt by 4 percent to 6 percent, the statistics office said this month.
Finance Minister Michael Spindelegger is looking into ways to get a contribution from former shareholders Bayerische Landesbank and the Carinthia province, and from Hypo Alpe’s bondholders. Some opposition politicians called on the government to let the bank fail to shield taxpayers.
Austria’s bank woes will probably make it miss a 2016 balanced-budget target, state-run Wifo researchers said.