Austria Loses Third AAA Badge as Moody’s Bemoans Weak Growth

  • Downgrade follows S&P, Fitch after sharp rise in debt level
  • Slow, incremental official response to challenges: Moody’s

Austria lost its top debt grade from the third major ratings company as Moody’s Investors Service downgraded the Alpine republic to Aa1, citing the government’s inability to reverse weakening growth prospects that make it hard to cut debt in coming years.

Moody’s, which followed Fitch Ratings’ downgrade to AA+ in February of last year and Standard & Poor’s in 2012, expects Austria’s output to grow less than the median for Aaa-rated countries until 2020, while its debt level is above the median, the company said in a statement. Moody’s had changed Austria’s outlook to negative from stable in October, warning about the same factors.

“Notwithstanding the magnitude of Austria’s economic and fiscal challenges, the institutional response has been slow and incremental,” Moody’s said in the statement. “Moody’s does not believe that the measures announced to date will meaningfully raise Austria’s growth potential over the medium term.”

Austria’s debt level has risen sharply since 2009 due to the rescue of Austrian banks, whose expansion in eastern Europe and in credit-default swaps turned sour since 2008. Hasty nationalizations were exacerbated by procrastination in winding down the rescued banks, a government-appointed investigation reported 2014. The debt level increased by 21 percent of gross domestic product from 2007 to 2015, to 86 percent of GDP. That compares with a median of 38 percent for Aaa-rated countries, it said.

Reducing that level with the slow growth Austria manages to show will be difficult and gradual, and means the country won’t quickly regain the fiscal space it lost in the financial crisis, according to Moody’s.

At the same time, Austria’s export industry, the mainstay of its economic strength, has lost competitiveness with eastern European neighbors. Weak investment and consumption, sluggish productivity and low labor participation also contribute to the weak growth outlook that hampers its debt servicing ability, Moody’s said.

“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,” according to the company. “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.”

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