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Austria Loses AAA Rating at S&P on Hungary Banks, Italy Links

January 15, 2012

(For more on the region’s debt crisis EXT4 <GO>.)

Jan. 14 (Bloomberg) -- Austria lost its AAA rating at Standard & Poor’s because of its links to neighbors Italy, its second-biggest trading partner, and Hungary, where the Alpine country’s banks are the biggest lenders.

S&P cut Austria’s long-term debt rating one level to AA+ with a negative outlook, the ratings company said in a statement yesterday. It also lowered France’s AAA rating and that of seven other nations. Germany, the Netherlands, Finland and Luxembourg kept the highest debt rating.

“In our view, Austrian banks’ balance sheets could suffer from negative developments in major trading and outward direct investment partners -- such as Italy and Hungary,” S&P said in the statement. “In this instance, the banks could require additional government support. Furthermore, if economic growth is much weaker than we expect, this could undermine the government’s attempts to consolidate its budgets,” it said.

Austria has seen its financing cost rise since September as concerns mounted that its debt and deficit could rise should it be forced to pump more money into its banking sector because of rising losses in Hungary and other eastern European countries.

The risk that economic weakness in Italy, its second- biggest export customer after Germany, could hit growth added to those concerns. While the government started talks about additional spending cuts and tax hikes and took steps to limit the banks’ risk, it failed to establish a debt brake in the constitution.

‘Incomprehensible’ Solo

Austrian Chancellor Werner Faymann and Vice Chancellor Michael Spindelegger said in a joint statement that S&P’s measure is an “incomprehensible” solo and reiterated that the budget talks will be finished by the end of February.

S&P said it saw a one-in-three chance that it could lower Ausria’s rating again in this year or in 2013, adding that a further cut would happen if the country’s debt rose above 80 percent of gross domestic product. It stood at 71.6 percent at the end of September, according to Austria’s statistics office.

Austrian bonds fell yesterday, pushing the 10-year yield up 7 basis points to 2.98 percent in London. The yield had earlier fallen to as low as 2.88 percent. The extra interest Austria has to pay investors to hold its 10-year bonds instead of Germany’s rose 15 basis points to 130 basis points.

S&P put Austria, along with 14 other euro nations, on review for possible downgrade on Dec. 5, citing “the risk of the need for additional capital injections by the Austrian government” into the country’s banks.

Banks Exposed

Austrian banks are the biggest lenders in the former communist part of Europe, having lent $266 billion or about 70 percent of the country’s gross domestic product. While they are profitable in most of the countries, losses are rising in Hungary, whose government has imposed Europe’s highest banking tax and is forcing banks to swallow losses on foreign-currency denominated debt.

Erste Group Bank AG owns Hungary’s second-biggest lender, and Raiffeisen Bank International AG owning the country’s fifth- largest. In total, Austrian banks’ claims on Hungarian households, companies and the public sector stood at $41.6 billion at the end of June, compared with $23.4 billion for Italian lenders, according to the Basel, Switzerland-based Bank for International Settlements.

East Europe Loans

Austria, seeking to protect its rating, in November ordered its three biggest banks to curb new loans in eastern Europe in an attempt to limit their vulnerabilities. Since 2009, the Alpine republic has injected 9 billion euros ($11.4 billion) into banks and nationalized Kommunalkredit Austria AG and Hypo Alpe-Adria-Bank International AG.

“We may lower the rating if we come to believe that the weakening of Austrian banks’ balance sheets stemming from negative developments in major trading and outward direct investment partners meant that the Austrian government needed to recapitalize the banks,” S&P said.

Austria’s ties to southern neighbor Italy have turned into another potential risk factor. Lending by Austrian banks to Italian borrowers is $24.4 billion, according to the BIS numbers. The country’s second-biggest lender is owned by Italian bank UniCredit SpA. Italy devoured 7.8 percent of Austria’s exports in 2010, the second-biggest share after Germany.

‘Warning Shot’

Austria’s coalition government last year started talks to accelerate deficit reduction by 2 billion euros annually, starting this year. The precise split of the consolidation hasn’t been agreed between Chancellor Faymann’s social democrats and Finance Minister Maria Fekter’s conservatives. Lacking a two-thirds majority in parliament, they also failed to add a “debt brake” clause to the country’s constitution last year.

Central bank Governor Ewald Nowotny said the downgrade was a “warning shot” reminding that the government’s budget consolidation plans need to be implemented quickly and that it was right to take measures to limit the eastern European risk for Austrian banks.

Moody’s Investors Service affirmed Austria’s AAA rating Dec. 23 after a review while Fitch Ratings confirmed it Nov. 16.

The Wifo research institute in Vienna cut its 2012 growth forecast last month, citing government budget cuts that will push up unemployment. It sees gross domestic product rising 0.4 percent, down from a September prediction of 0.8 percent growth.

--Editor: Zoe Schneeweiss

To contact the reporter on this story: Boris Groendahl in Vienna at bgroendahl@bloomberg.net

To contact the editor responsible for this story: Frank Connelly at fconnelly@bloomberg.net


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