UPDATE: Fitch Affirms Germany at 'AAA,' Outlook Stable
Fitch Ratings has affirmed Germany's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'AAA' with Stable Outlook. The agency has also affirmed the Short-term foreign currency IDR at 'F1+' and the Country Ceiling at 'AAA'.
KEY RATING DRIVERS
The affirmation of Germany's sovereign ratings reflects the following factors:
- The government has overachieved on some key fiscal targets. The general government structural balance was in surplus in 2012 for the first time since re-unification, well within the 0.5% of GDP deficit medium-term objective (MTO) set under the Stability and Growth Pact. The federal structural balance was also better than the 0.35% of deficit limit from 2016 set under the German constitution. This helped the government beat its target for the headline fiscal balance for a second consecutive year in 2012, with a surplus of 0.2% of GDP.
- Fitch believes the debt/GDP ratio has peaked. Germany has all the ingredients of a declining public debt path. The economy is growing, the budget position is relatively favourable and nominal interest rates are low. Furthermore, while debt at 81.9% of GDP in 2012 remains elevated compared with the 'AAA' median of 49%, it is within the range consistent with a 'AAA' rating.
- Risk from contingent liabilities from the eurozone crisis have eased. This reflects the recent strengthening of eurozone governance measures, including the implementation of the EU 'two-pack' regulation, which has enshrined fiscal consolidation in national economic policies. The ECB's Outright Monetary Transactions has significantly eased some of the tail risks for the eurozone outlook. However, Fitch believes the eurozone crisis is not yet over and will require further country-level fiscal and structural adjustment, greater progress towards a banking union and a broad-based economic recovery across the currency union
- Fitch also does not view the prospect of further sovereign support for German domestic banks as a significant threat to sovereign solvency. However, at this point there is considerable uncertainty over the parameters of the H114 EBA stress test and ECB asset quality review.
- The fiscal adjustment effort needed to achieve the long run sustainability of public finance in light of the rising cost of an ageing population is less than half the EU average due to the current favourable fiscal flows. The shrinking of the population and work force is nevertheless a key factor in Germany's relatively low long-term potential economic growth, which is estimated to be between 1.25% and 1.5%.
- Germany has a high-value added economy with a competitive manufacturing sector and effective political, civil and social institutions.
- It is the primary benchmark issuer for the eurozone, which gives it significant fiscal financing flexibility. As a consequence of safe-haven capital inflows, yields are extremely low across the curve.
- Germany is a significant net external creditor with one of the strongest net international investment position in the world and a large current account surplus.
The Outlook is Stable. Consequently, Fitch's sensitivity analysis does not currently anticipate developments with a high likelihood of leading to a rating change. However, future developments that could individually or collectively, result in a downgrade of the ratings include:
- Intensification of the eurozone crisis. As the largest contributor to any eurozone rescue package, and with significant financial sector exposure to peripheral eurozone economies, Germany remains exposed to the risks of spill-over from the sovereign debt crisis.
- A debt ratio of 90%-100% of GDP would start to put pressure on the rating, although Fitch does not view such an outcome as likely. Prolonged economic stagnation, a weakening in the underlying budgetary position, and/or further state support to the banking sector would lead to further increases in public debt over the medium term.
The ratings and Outlooks are sensitive to a number of assumptions.
Fitch assumes Germany's economic growth to rise to 1.5% by 2014 from 0.4% in 2013. This is premised on the soft eurozone recovery staying on track.
Fitch assumes there will be progress in deepening fiscal and financial integration at the eurozone level in line with commitments by policy makers. It also assumes that the risk of fragmentation of the eurozone remains low.
Official objectives to remain within the MTOs on the headline and federal structural balance through 2017 are plausible and Fitch expects general government deficit/GDP and debt/GDP ratios to be broadly in line with government projections into the medium term. Fitch expects the debt ratio to be close to 70% of GDP by 2017.
Fitch assumes no further contributions by Germany to the eurozone crisis mechanisms. The impact of the eurozone crises on debt/GDP was 2.5% of GDP by 2012 and included contributions to the EFSF, ESM, and bilateral loans to Greece and capital increase for the European Investment Bank. This was 1.8 percentage points more than in 2011.
The agency also expects no further burden from the German financial sector, rather as the workout of nationalised institutions progresses, the sale of existing assets could reduce public debt. According to data from Eurostat, government liabilities related to the banking sector amounted to 10.8% of GDP in 2012, down from a peak of 12.2% in 2010. Contingent liabilities relating to the banking sector were 2.2% of GDP.
Elections will be held on 22 September to decide the members of the Bundestag, the main federal legislative house of Germany. Fitch assumes German policy will remain broadly similar at the European and domestic levels.
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