Fitch affirms Germany at 'AAA'; outlook stable

07 August 2013

Fitch Ratings has affirmed Germany's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'AAA' with Stable Outlook. The agency has also affirmed the Short-term foreign currency IDR at 'F1+' and the Country Ceiling at 'AAA'.

The affirmation of Germany's sovereign ratings reflects the following factors:

• The government has overachieved on some key fiscal targets. The general government structural balance was in surplus in 2012 for the first time since re-unification, well within the 0.5 per cent of GDP deficit medium-term objective (MTO) set under the Stability and Growth Pact. The federal structural balance was also better than the 0.35 per cent of deficit limit from 2016 set under the German constitution. This helped the government beat its target for the headline fiscal balance for a second consecutive year in 2012, with a surplus of 0.2 per cent of GDP.
• Fitch believes the debt/GDP ratio has peaked. Germany has all the ingredients of a declining public debt path. The economy is growing, the budget position is relatively favourable and nominal interest rates are low. Furthermore, while debt at 81.9 per cent of GDP in 2012 remains elevated compared with the 'AAA' median of 49 per cent, it is within the range consistent with a 'AAA' rating.
• Risk from contingent liabilities from the eurozone crisis have eased. This reflects the recent strengthening of eurozone governance measures, including the implementation of the EU 'two-pack' regulation, which has enshrined fiscal consolidation in national economic policies. The ECB's Outright Monetary Transactions has significantly eased some of the tail risks for the eurozone outlook. However, Fitch believes the eurozone crisis is not yet over and will require further country-level fiscal and structural adjustment, greater progress towards a banking union and a broad-based economic recovery across the currency union
• Fitch also does not view the prospect of further sovereign support for German domestic banks as a significant threat to sovereign solvency. However, at this point there is considerable uncertainty over the parameters of the H114 EBA stress test and ECB asset quality review.
• The fiscal adjustment effort needed to achieve the long run sustainability of public finance in light of the rising cost of an ageing population is less than half the EU average due to the current favourable fiscal flows. The shrinking of the population and work force is nevertheless a key factor in Germany's relatively low long-term potential economic growth, which is estimated to be between 1.25 per cent and 1.5 per cent.
• Germany has a high-value added economy with a competitive manufacturing sector and effective political, civil and social institutions.
• It is the primary benchmark issuer for the eurozone, which gives it significant fiscal financing flexibility. As a consequence of safe-haven capital inflows, yields are extremely low across the curve.
• Germany is a significant net external creditor with one of the strongest net international investment positions in the world and a large current account surplus.

Full press release

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