Austria Bank Capital Needs Decisive for Aaa Rating, Moody’s Says

Austria’s top debt ranking is most threatened by the potential for another round of state aid for the nation’s banks, Moody’s Investors Service said, the second such alarm from a rating company in as many months.

Moody’s cut Austria’s outlook to “negative” and may strip its Aaa rating if lenders require a second bailout, given the nation’s finances have worsened since 2008, the company said yesterday. The outlook could return to “stable” if banks can bolster capital without state help, Moody’s said. Standard & Poor’s cited bank risks when it cut Austria to AA+ last month.

“We don’t think the Austrian debt level is worrisome or out of sync with debt levels in other European countries, but the potential contingent liability is bigger than in other countries, and the debt ratio is at the higher end of the triple-A rating category,” Kathrin Muehlbronner, Moody’s head analyst on Austria, said in an interview.

The nation’s biggest banks, including Erste Group Bank AG (EBS), Raiffeisen Bank International AG (RBI) and UniCredit SpA (UCG)’s Bank Austria unit, are the biggest lenders in eastern Europe and face major losses in Hungary. Austria nationalized two banks on the brink of collapse in 2008 and 2009, and will remain saddled with their non-performing or unsellable assets of more than 30 billion euros ($40 billion) as they are wound down for years.

Moody’s says Austria’s debt-to-gross-domestic-product ratio was about 75 percent in 2011, compared with a median of 52 percent for Aaa-rated countries. The government has responded to the debt crisis with a 26.5 billion-euro plan to raise taxes and cut spending.

‘Volatile Countries’

Austria was among nine European sovereigns to have ratings cut or their outlook changed yesterday. Bond investors shrugged off the reports from Moody’s today, with borrowing costs falling at Spanish and Italian debt auctions on optimism the crisis is easing. Austrian bonds were little changed, with the 10-year yield rising 1 basis point to 2.88 percent at noon local time.

“Investors are making up their own minds, and the low yields we are seeing shows that our measures have an impact,” Austrian Chancellor Werner Faymann said today.

Austria still has more work to do, Muehlbronner said.

Its banking system is “relatively large, has a very large exposure to the more volatile countries in central and eastern Europe, and is also reliant on wholesale funding,” with lower credit ratings than banks in other Aaa countries, she said. “Austria is not necessarily out of the woods.”