DBRS Confirms Republic of Germany at AAA, Stable Trend

DBRS Ratings Limited (DBRS) has today confirmed the Federal Republic of Germany’s long-term foreign and local currency issuer ratings at AAA and the short-term foreign and local currency issuer ratings at R-1 (high). All ratings have a Stable trend.

The confirmation of the Stable trend reflects DBRS’s view that the challenges faced by Germany are abating and are comfortably offset by the country’s strengths. The trend could be changed to negative in the event of a marked deterioration in growth prospects that places the public debt to GDP ratio on a persistent upward trajectory. A re-intensification of the sovereign debt crisis, resulting in a large impact on Germany’s stock of public sector debt through the country’s participation in the various euro area rescue mechanisms, could also put downward pressure on the ratings.

Germany benefits from a large, competitive and diversified economy. The country’s high GDP per capita, at EUR35,267, its high productivity per worker, and its high share of exports in GDP are all key factors supporting the rating. In addition, a dynamic and diversified export market, healthy private sector balance sheets, as reflected in a modestly indebted household and non-financial corporate sector; and high savings also lend resilience to the economy, as evidenced by its ability to weather the financial and sovereign debt crises relatively well. In addition, 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.

The country’s strong fiscal framework supports fiscal discipline and further enhances its creditworthiness. The country’s fiscal framework encompasses the “debt brake” rule, introduced into the Constitution in 2009, and various additional fiscal rules and guidelines enacted at the EU and euro area level, and which were formally transposed into national legislation in 2013. In addition, a fiscal surveillance arm, comprising the Stability Council, provides early warnings when the federal government or any of the country’s German States are at risk of not meeting their fiscal targets.

Moreover, the German government’s progress on fiscal consolidation since the crisis, coupled with its credible plans to continue to reduce its stock of debt over the medium-term to the 60% Maastricht Treaty reference value, also underpin Germany’s credit strength. After posting balanced budgets since 2012 at the general government level, the federal government reached a balanced budget in 2014 according to provisional data published in January. The better than anticipated performance at the federal level reflects stronger than expected revenues and slightly weaker than anticipated spending. In structural terms, the federal government is anticipated to record a surplus of 0.28% of GDP, well below the ceiling for a deficit of no more than 0.35% of GDP. Healthy budgetary outturns coupled with the reduction in interest costs and an expansion in GDP, have been key factors supporting debt reduction. The government debt to GDP ratio, which peaked at 81.9% in 2012, declined to an estimated 74.2% of GDP by the end of 2014. Over the medium-term, growth of 1.5% per annum and primary surpluses of 2.0% of GDP are expected to underpin reductions in the debt to GDP ratio, thereby further boosting the shock-absorbing capacity of the sovereign.

The healthy balance sheet position of the country’s corporations and households, which have resulted in a strong net lending position for the whole economy and have helped to keep external debt at relatively moderate levels, also supports the ratings. Looking ahead, DBRS expects that households' strong balance sheets will support private consumption, whilst increasing savings by corporations could also support investment over the medium-term. The robust performance of the labour market, with unemployment declining further in 2014 to 5.0%, should support domestic demand.

Moreover, risks stemming from the banking sector, once a key vulnerability for the sovereign, are gradually receding. The restructuring of the financial sector reduced financial vulnerabilities, whilst preserving the ability of the banks to provide credit to the economy. In particular, DBRS takes comfort from the findings by the ECB’s comprehensive assessment of the banking sector which showed that the balance sheets of the largest 25 German banks are sound and robust enough to weather relatively severe economic shocks. Finally, contingent liabilities in the form of large government guarantees to the banking and corporate sectors, have declined substantially in recent years, as many of the guarantees provided to the banking sector have now expired.

Despite these strengths, Germany faces a number of challenges. The increased uncertainty over Greece’s willingness and capacity to comply with the EU-IMF adjustment programme could add to downside risks to the growth outlook. Moreover, as the largest contributor to any official rescue package, Germany is financially exposed to a re-intensification of the Eurozone crisis. Secondly, an escalation of geopolitical tensions over Ukraine and Russia could also negatively impact Germany’s economy. Although, Germany’s exports to Russia are relatively small, at approximately 3% of total exports in 2014 Russia accounts for 40% of Germany’s total gas consumption. However, DBRS believes that in order for Germany’s growth performance to be impacted materially, an extreme scenario would need to unfold, with a deep recession in Russia and severe disruptions in energy supply. DBRS sees such a scenario as currently unlikely.

Over the longer term, demographic trends pose a significant challenge to Germany’s growth potential, especially in the face of growing support for restrictions on immigration. Thus, whilst DBRS takes comfort from the government’s adoption of a comprehensive set of measures aimed at boosting the participation and employment rates of women, older workers and the long-term unemployed, measures related to early retirement are likely to go in the opposite direction and result in lower labour force participation rates for older workers. Finally, weak prospects for investment spending are likely to continue to weigh on the contribution of domestic demand to growth and put downward pressure on the country’s growth potential.

Notes:
All figures are in Euros (EUR) unless otherwise noted.

The principal applicable methodology is Rating Sovereign Governments, which can be found on the DBRS website under Methodologies. The principal applicable rating policies are Commercial Paper and Short-Term Debt, and Short-Term and Long-Term Rating Relationships, which can be found on our website under Rating Scales.

These can be found on www.dbrs.com at:
http://www.dbrs.com/about/methodologies

The sources of information used for this rating include the Deutsch Bundesbank, the Ministry of Finance, the German debt agency (i.e. the Deutsche Finanzagentur), the Federal Statistical Office, the Stability Council, the IMF, the OECD, the European Commission, and Haver Analytics. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

Information regarding DBRS ratings, including definitions, policies and methodologies are available on www.dbrs.com.

This is an unsolicited credit rating. This credit rating was not initiated at the request of the issuer.

Generally, the conditions that lead to the assignment of a Negative or Positive Trend are resolved within a twelve month period, while reviews are generally resolved within 90 days. DBRS’s outlooks and ratings are under regular surveillance.

For further information on DBRS historic default rates published by the European Securities and Markets Administration (“ESMA”) in a central repository, see:
http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU regulations only.

Lead Analyst: Javier Rouillet, Assistant Vice President (AVP)
Initial Rating Date: 11 November 2011
Rating Committee Chair: Roger Lister, Chief Credit Officer
Last Rating Date: 26 September 2014

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