Austria 'Regrets' Moody's Outlook Downgrade

by Ulrika Lomas, Tax-News.com, Brussels

20 February 2012

Austria’s federal ministry of finance (BMF) has welcomed Moody’s decision to keep the credit rating of the Republic of Austria at triple-A status, while lamenting the fact that the change in outlook from ‘stable’ to ‘negative’ does not take adequate account of the coalition’s recently agreed austerity package.

In terms of its reasons for keeping Austria’s credit rating at top status, Moody’s cited inter alia Austria’s strong, diversified economy, its lack of macroeconomic imbalances, its low levels of unemployment and the fact that the country has had a current account surplus since 2002 – as well as the fact that the 2011 budget deficit has turned out better than expected as a result of greater tax revenues and stricter spending discipline.

Moody’s nevertheless changed Austria’s outlook from “stable” to “negative”, with external factors, such as the international debt crisis, and the exposure of the Austrian banking sector in Eastern Europe, playing a major role in the decision to adjust the outlook downward.

Regretting this decision, the BMF states that: “This change of status takes insufficient account of the austerity package which has just been adopted. Moody’s assumption is that the debt ratio will increase, whereas the new deficit package provides for significantly lower rates of debt beginning in 2012.”

Moody's also stated that the negative outlook could result in a downgrade if either the eurozone crisis increases drastically or the need arises to provide further significant aid to the banking sector.

The ministry reacted by noting that: “At present there are no indications that such aid will be necessary. The Austrian financial sector is currently implementing various measures to strengthen its capital base. It is our assumption that Moody’s will take account of the measures implemented in its future ratings. Moody's itself says that significant improvement to the capital base of the Austrian financial sector will lead to Austria’s outlook being returned to “stable”."

Austria’s coalition government recently united on plans for “the largest reform package” of the Second Republic, designed to consolidate the country’s public finances.

Unveiling details of the agreement, which will total EUR26.5bn (USD34.9bn) by 2016, comprising 76% of expenditure-based savings and 24% savings by closing existing tax loopholes, Austria’s Finance Minister Maria Fekter stressed at the time that the ratio of expenditure- and revenue-based measures sends out a “strong signal” of the government’s commitment to saving, by electing a sustainable cost reduction course to gradually reduce the deficit. Despite the large volume of measures, the initiatives do not inhibit growth and investment and above all do not endanger jobs, the minister added.

The minister underscored how important it was to close existing loopholes in the tax law, and above all to protect the middle class. Fekter ended by emphasizing that the consolidation package was drafted without recourse to an annual tax on wealth, to the reintroduction of an inheritance and gift tax or to an increase in the top rate of tax.

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