Fitch Maintains Germany at AAA, Outlook Stable
Fitch Ratings maintained Germany's AAA rating and reaffirmed a stable outlook Wednesday.
"The affirmation reflects Germany's longstanding credit strengths and robust economic performance over the past two years," said the ratings agency in a statement. "Against the background of fragile global recovery and the intensification of the eurozone crisis, Germany has recorded strong GDP growth and a declining trend in unemployment, partly as a result of previous structural reforms."
Fitch cited record-low unemployment, strong export-driven growth and accomodative ECB policy as reasons for maintaining Germany's AAA rating. Also, the firm said low yields due to capital inflows make Germany's long-term funding costs manageable.
"Furthermore, Germany has a strong net external creditor position and a large, albeit gradually declining, current account surplus," said the firm.
However, Fitch also pointed out some troublesome areas for Germany. First, the firm said bank profitability remains low as credit growth in the Eurozone slows, which could make it difficult for German banks to raise new capital. Thus, if the banks fail to meet Basel III standards, Germany may be liable to inject liquidity. With low profitability and increasing risks to funding in the Eurozone, this could be a sticking point for Germany's AAA rating.
"Following the pledge of 100 billion euros to recapitalise the Spanish banking sector, Fitch considers the likelihood of disbursing all of the EFSF's 440 billion euro lending capacity to have risen significantly. Given Germany's maximum guarantee of 211 billion euros, this would translate into a 7 percentage point increase in the gross debt-to-GDP ratio," added Fitch.
One other concern Fitch noted about Germany is the nation's exposure to peripheral bonds. This risk remains even though, since mid-2008, German banks' exposure to all Eurozone members has fallen by 30 percent and exposure specifically to Greece, Italy, Spain and Portugal has fallen by 44 percent, according to Fitch.
"Despite this fast pace of deleveraging, the quality of the remaining assets may well deteriorate further as the recession deepens in the periphery," said Fitch.
Thus, Germany may have to recapitalize its banks if asset values fall further, putting strains on its debt levels and potentially its credit rating.
The full text of the release can be found here.
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