Risk experts adopt a nuanced position on Austria
The credit implications of resolving failed lender Hypo Group Alpe Adria (HGAA) are not what they seem. The upshot is Austria is not about to suffer the same fate as Cyprus, Iceland or Ireland.
On a total risk score of 77.9 out of a maximum 100 points, Austria is the lowest tier-one rated sovereign in Euromoney’s Country Risk Survey, grouped together with the least-riskiest borrowers worldwide in the global rankings.
Austria’s score is more than seven points worse off since 2010, when it was regarded safer than Germany, and has edged downwards this week – signalling it might soon drop into tier two.
That would still put it on a par with an AA credit rating – lower than the AA+ awarded by Fitch and S&P, and Aaa from Moody’s – but more in line with Belgium, the UK and France than the world’s gold-plated sovereigns with stronger political, economic or structural risk profiles.
Newly discovered liabilities in Heta Asset Resolution, HGAA’s bad bank – triggering an early application of the European Union’s bank recovery and resolution directive and bailing-in senior creditors – highlights spillovers for Austria’s financial system, the state of Carinthia underwriting the debt, and other guarantors in Germany.
Austrian banks are also burdened by riskier residential and corporate liabilities accruing on eastern European lending, including the links to Swiss franc-denominated mortgage borrowing.
Euromoney’s survey experts are consequently viewing the risks for Austria more cautiously, downgrading their scores slightly, but are not hugely discomforted by these events.
Austria’s bank stability score of 7.0 out of 10 remains reasonable, better off than France, and aspects of its macroeconomics are favourable, with falling inflation supporting growth and unemployment very low in a European context.
Adjunct professor at Trinity College Dublin Constantin Gurdgiev believes Vienna’s refusal to underwrite Heta’s losses and enforce insolvency on Carinthia is a positive longer-term move.
The HQ of Hypo Alpe
“The plan to bail in some €7.6 billion of external creditors’ funds is adding to volatility in the short run, but marks an important point of departure from the crisis ‘solutions’ of the past [breaking the bank-sovereign links] and signals the non-systemic nature of HGAA at this point in time,” he says. Gurdgiev believes the increased market-noise is a minor shockwave that will be offset by the positive investor sentiment arising from the European Central Bank’s quantitative-easing programme.
In any event, there will be longer-term gains from “restoring the quality of the sovereign balance sheet and removing future uncertainty concerning the links between the banking sector and the sovereign”, he claims.
Where he is more cautious is regarding Austrian institutional risk, and the regulatory and policymaking environment, two of the 15 risk factors experts are asked to regularly assess.
Other Austrian risk experts have lowered or are about to lower their scores to reflect political risks and the damaged reputation to the banking sector, but with no notable negative impact overall. Not all risk factors will fall, and some might in fact improve, several have mentioned to Euromoney.
The issue is one of trust and reputation, argues one expert speaking under condition of anonymity.
The worst case is the default of a state (Carinthia), but the federal government would ensure the functioning of public services. Besides, there are positives for the sovereign from using the bail-in conditions, given the taxpayer will no longer foot the bill.
The regulatory and policy factor might be downgraded, another expert has suggested, and bank stability too, but the government finances indicator will improve.
Another respondent further emphasized that the issue is complicated. There will be a raft of lawsuits, which will take years to resolve; this being the first test-case of the new directive.
Last year, Austria’s risk experts became more concerned by the country’s institutional risks, the stability of the governing two-party rainbow coalition now struggling in the opinion polls and squabbling over key elements of economic policy. Austria’s demographics and government finances were also downgraded.
These changes revealed how the country’s investor image has become tarnished, and also how deeper reforms are required to cope with an ageing population.
However, the experts also believe the negative factors arising from these banking-sector resolution problems will be balanced by some positives.
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