Even a few weeks ago, it would have been unthinkable for Austria, previously a byword for financial stability, to need to reassure markets that its triple-A credit rating was safe.
However, such is the crisis engulfing the eurozone that this is what Austrian Finance Minister Maria Fekter had to do last week, telling nervous investors that talks with ratings agency Moody’s had gone “very well.”
The rate of return on Austrian government bonds has risen of late, with the difference or spread compared to equivalent German securities widening, indicating investors see Austria as riskier than its larger neighbor.
“We are seeing generic attitudes beginning to impact triple-A countries seen until now as very solid,” Deutsche Bank economist Gilles Moec said, calling the situation “irrational.”
There are, however, some concerns, not least the exposure of Austrian banks to wobbly economies in central and eastern Europe and what a government rescue by Vienna would do to the country’s public finances.
Lenders like Erste Bank, Raiffeisen (RBI) and Italian powerhouse UniCredit’s Bank Austria unit have looked east in recent years to find new customers and benefit from stronger economic growth than in their home market.
As a result, they are sitting under a mountain of loans which, if they go bad, could land the banks in serious trouble, forcing the Austrian government to ride to the rescue with billions of euros in taxpayers’ money.
Already there are signs that the crisis is causing pain in the newer members of the EU, with Hungary, for instance, approaching the IMF and EU for possible assistance.
Erste Bank expects to end this year 700 million euros to 800 million euros (US$900 million to US$1.1 billion) in the red, while RBI is “intensively” considering pulling out of individual markets, although it insists it is broadly “happy” being active in the region.
The banks insist they are sufficiently capitalized, and the Austrian government says the wealthy Alpine country, which has the lowest unemployment rate in the EU, can comfortably afford any rescue.
Nevertheless, Austria’s central bank and its financial regulator last week called on banks to be more prudent about lending in the region and to strengthen their balance sheets to comply with new international rules.
The aim, according to Austrian central bank head Ewald Nowotny, was to make “exposure to this region ... become more sustainable.”
The government of Austrian Chancellor Werner Faymann, meanwhile, unveiled in the middle of this month plans to enshrine having a more balanced budget into Austria’s constitution, in line with a eurozone leaders’ agreement late last month.
Austria, like other countries in the Western world, has been living beyond its means for years, with its national debt at almost 75 percent of annual output — still a far cry from the likes of Greece, which has a debt load that is twice as large.
The new “golden rule” would oblige Austria to reduce its annual budget deficit to 0.35 percent of GDP by 2017 and its debt to less than the EU maximum of 60 percent over the next decade.
Moody’s welcomed the plan, saying it “indicates a strong -political commitment to sound public finances.”
It noted however that a “significant” acceleration in deficit reduction was needed to meet the target, and Faymann said Austria needed to cut spending by 2 billion euros every year.
With the “grand coalition” government unable to agree on much, it is unclear where the ax will fall, and the constitutional changes would require support from at least one opposition party.
However, the cost of failure would be high.
“If Austria’s credit rating is lowered by one notch, from ‘AAA’ to ‘AA+,’ we would have to pay 3 billion euros more in interest payments each year,” Foreign Minister and Deputy Chancellor Michael Spindelegger said.