S&P ON AUSTRIA’S DOWNGRADING
IF ECONOMIC GROWTH IS WEAKER THAN WE EXPECT, THIS COULD UNDERMINE THE GOVERNMENT'S ATTEMPTS TO CONSOLIDATE ITS BUDGETS
Austrian banks' balance sheets could suffer from negative developments in major trading and outward direct investment partners (such as ITALY and HUNGARY). 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, and could also render structural reforms ineffective.
The outlook on the long-term rating on AUSTRIA is negative; indicating that we believe that there is at least a one-in-three chance that we could lower the rating further in 2012 or 2013. Rating may be lowered if:
• 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. This could in turn lead to net general government debt rising above 80% of GDP, and could also further increase contingent liabilities; and/or
• Economic growth is much weaker than we currently expect. This could undermine the government's attempts to consolidate its budgets, and could also render structural reforms ineffective. This could lead to an increase in net general government debt beyond 80% of GDP.
The ratings could stabilize at the current level if the risks from the banking sector remained contained, and if AUSTRIA were to enter into a more-ambitious consolidation phase by implementing structural reforms, without damaging economic growth prospects and competitiveness. In our view, such consolidation measures would likely enable AUSTRIA to structurally balance its accounts and decrease its net general government debt.
Analysis from “The Prudent Investor”
OVERDUE DOWNGRADING LIKELY TO BE REPEATED
As a reminder: AUSTRIAN government debt stands currently at EUR 218 billion or 76% of GDP and races higher because the ruling coalition officially attempts to come up with a €3 billion to €10 billion budget cuts package by end of February while it cannot even agree on €250 million savings on the state level of the republic. Place you bet on every ounce of gold that there will be no multi-billion austerity package by the end of February.Statements by the government and central bank governor EWALD NOWOTNY, who called the downgrade incomprehensible, are unrealistic in the light of S&P's warning from December 6 and the ensuing non-action by AUSTRIA'S government.
DOWNGRADES WERE A POLITICALLY MOTIVATED ACTION BY S&P WHICH IS OWNED BY MCGRAWHILL
Unofficial mumblings that markets should not take the downgrade too serious are actually a call to break the law: Bond fund managers are tightly restricted by investment fund laws that oblige them to observe the ratings of the three major rating agencies.
Nevertheless one can agree with governor NOWOTNY that the downgrades were a politically motivated action by S&P which is owned by MCGRAWHILL. It seems difficult to establish who the majority owner of this company is, that has so far failed to downgrade the USA despite its much higher level of debt that already stands at more than 100% of US GDP. The rating agencies also veil their rating process in secrecy and it will be interesting to see the math behind a one-step downgrade.
A look at AUSTRIA'S yield differential to its peer GERMANY shows that spreads have risen dramatically over the past months. AUSTRIA used to pay a spread of 30 to 40 basis points 'liquidity premium' for almost two decades. This has changed dramatically: 10-year government bonds now yield around 3.60% vs. GERMANY'S 1.90%, showing that markets assess AUSTRIA by now much worse than GERMANY.
GOVERNMENT NOT ADDRESSING THE KEY OBSTACLES OF THE FUTURE
Markets are, as always, most correct in their evaluation of AUSTRIAN debt: Members of parliament and the government waste time haggling about changes in the national hymn while not addressing the key obstacles of the future that are:
• a huge pension problem as demographics change (what a surprise for politicians: we all become older),
• a growing budget deficit due to a still growing public sector, and
• huge problems of several Austrian banks who recolonised Eastern Europe and now face billions in loans in default.
The concernment in the EUROZONE about the downgrade 'shock' proves once more that while EU politicians are never shy of trying to cut corners to their advantage they lack creative ideas to save the EUROZONE from rapid disintegration.
MCGRAWHILL is currently valued at billion. It would have been a lot cheaper to buy MCGRAWHILL and gag its subsidiary S&P. These billions would have brought ownership of a flourishing publishing company. Now this money will end up in the coffers of JP MORGAN, GOLDMAN SACHS, who can borrow trillions from the FEDERAL RESERVE for next to nothing and buy up higher yielding EUROPEAN GOVERNMENT DEBT.
This is a currency war and the EUROZONE is on the way to lose it.