Frankfurt am Main, February 28, 2014
Moody’s Investors Service, (“Moody’s”) has today changed the outlook on Germany’s Aaa government bond rating to stable from negative. Concurrently, Moody’s has affirmed Germany’s Aaa ratings.
The key drivers for today’s outlook change are:
- Diminished risks that Germany’s government balance sheet will be affected by further collective support to other euro area countries, in particular to Italy (Baa2 stable) or Spain (Baa2 positive), along with reduced contagion risks within the wider euro area.
- Progress with respect to fiscal consolidation as reflected in nearly balanced budgets in 2012 and 2013 and a declining debt-to-GDP ratio.
- Diminished risks that Germany’s government balance sheet will be affected by a further crystallization of contingent liabilities from the German banking system.
Moody’s has affirmed Germany’s Aaa rating due to the country’s advanced and diversified economy, very high debt affordability and a history of stability-oriented macroeconomic policies.
In a related rating action, Moody’s has today changed the outlook to stable from negative on the Aaa rating from of FMS-Wertmanagement (FMS-WM) and affirmed FMS-WM’s Aaa and Prime-1 ratings.
FMS-WM is a resolution agency or “bad bank” scheme for 100% state-owned Hypo Real Estate Group created under the Financial Market Stabilisation legislation in Germany. FMS-WM is rated on par with the German sovereign. This is due to a loss compensation obligation from the Financial Market Stabilisation Fund vis-à-vis FMS-WM, which is ultimately an obligation of the German sovereign.
RATIONALE FOR OUTLOOK CHANGE
–FIRST DRIVER: DECLINING RISKS FROM EURO AREA DEBT CRISIS–
The first driver of Moody’s decision to change the outlook on Germany’s Aaa rating to stable is the reduced risk that the government’s balance sheet will be affected by the need to contribute to further collective support for other euro area countries, and in particular to Italy or Spain, along with reduced contagion risks within the wider euro area.
These improvements in conditions reflect country-by-country progress in consolidating public finances and correcting macroeconomic imbalances. All peripheral countries share the same improving trend, though the extent of the progress achieved and the challenges that remain vary across countries. This has been reflected in recent outlook changes and rating upgrades, including the recent upgrade of Spain’s rating to Baa2 (positive) from Baa3 (stable) and Ireland’s rating to Baa3 (positive) from Ba1 (stable), the change in the outlooks on Italy’s Baa2 rating and Portugal’s Ba3 rating to stable from negative, amd the upgrade of Greece’s rating to Caa3 stable from C.
Improvements in the euro area institutional framework have also contributed to the reduction in contagion risks. These include the introduction of Outright Monetary Transactions (OMT) by the European Central Bank (ECB), the set-up of back-stop facilities like the European Stability Mechanism (ESM), and progress towards a ‘Banking Union’. Ultimately, these changes imply (1) that the likelihood of further support efforts being needed has decreased; and (2) that the magnitude of any such support, should it be needed, will also have diminished because of the improvement in peripheral country public finances. Fundamental improvements and institutional progress have mitigated liquidity concerns, thereby dampening market volatility and improving funding conditions within the euro area.
–SECOND DRIVER: CONTINUED PROGRESS WITH FISCAL CONSOLIDATION–
Germany has further progressed with fiscal consolidation and its fiscal performance compares favourably to its Aaa and Aa-rated peers, evidenced by the general government budget that remained close to balance for the second consecutive year in 2013. Furthermore, and in line with the government’s expectations, Moody’s expects balanced fiscal budgets for 2014 and 2015. The recent plans concerning the retirement system represent a risk for fiscal trends in the medium-term. However, Moody’s central scenario considers that the authorities are unlikely to deviate from the prudent fiscal policy stance announced in the coalition agreement.
Against the background of a balanced budget and positive GDP growth, Moody’s estimates that Germany has reduced its general government debt to GDP ratio to 79% of GDP in 2013, down from 81% in 2012 (2010: 82.5%). This reduction in the debt-to-DP ratio was partly due to progress with winding-down the portfolios of Germany’s two bad banks (FMS-WM and Erste Abwicklungsanstalt).
The downward trajectory of the debt-to-GDP ratio confirms the government’s high shock-absorption capacity and ability as well as willingness to address negative debt trends. Moreover, Germany’s low funding costs ensure that its high debt levels and interest expenses remain affordable. Furthermore, Moody’s expects the debt to GDP ratio to continue to decline in the coming years, reaching around 70% of GDP by the end of 2016 in the rating agency’s central scenario.
–THIRD DRIVER: REDUCED BANKING SECTOR RISKS–
The third driver of today’s rating action is the diminished risk that Germany’s government balance sheet will be affected by a further crystallization of contingent liabilities from the German banking system. Moody’s changed the outlook on the German banking system to stable from negative in September 2013. This change reflects German banks’ stronger ability to withstand shocks because of a year of reduced crisis-related losses and improved capital strength. The German banking system’s exposure to non-core countries has continued to decline and the susceptibility to those risks is lower given that German banks have improved their loss absorption capacity. The banks have also reduced their exposure to other risky assets such as structured credit products, commercial real estate and shipping.
The stable outlook on the banking system also takes into account prospects of a stable operating environment due to an improving economy and overall benign credit environment, and continued strengthening of the banks’ capital buffers due in part to more stringent capital requirements. The stabilising effect of an ongoing reduction in high-risk assets and deleveraging, and low funding risk also contribute to the stable banking system outlook.
–RATIONALE FOR AFFIRMING GERMANY’S Aaa RATING
Germany’s Aaa rating is underpinned by the country’s advanced and diversified economy and a history of stability-oriented macroeconomic policies. High productivity growth and strong global demand for German products have allowed the country to establish a broad economic base with ample flexibility, generating high income levels. Germany’s current account surplus supports the resiliency of the economy. Moreover, Germany benefits from high levels of investor confidence, which are reflected in very low debt funding costs, leading to very high debt affordability.
–WHAT COULD MOVE THE RATING DOWN
Downward pressure on Germany’s Aaa rating could occur if Moody’s were to observe a prolonged deterioration in the government’s fiscal position and/or the economy’s long-term strength. Furthermore, a renewed intensification of the euro area debt crisis, in particular if large countries such as Italy and Spain were affected, would also be credit negative.
GDP per capita (PPP basis, US$): 38,666 (2012 Actual) (also known as Per Capita Income)
Real GDP growth (% change): 0.7% (2012 Actual) (also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 2% (2012 Actual)
Gen. Gov. Financial Balance/GDP: 0.1% (2012 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: 7% (2012 Actual) (also known as External Balance)
External debt/GDP: [not available]
Level of economic development: Very High level of economic resilience
Default history: No default events (on bonds or loans) have been recorded since 1983.
On 24 February 2014, a rating committee was called to discuss the rating of the Germany, Government of. The main points raised during the discussion were: The issuer’s fiscal or financial strength, including its debt profile, has increased. The issuer has become less susceptible to event risks.