DBRS Confirms Federal Republic of Germany at AAA, Stable Trend

DBRS Ratings Limited 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 comfortably offset by the country’s strengths. The trend could be changed to Negative in the event of a severe deterioration in growth prospects that places the public debt to GDP ratio, currently at 74.7%, on a persistent upward trajectory. A re-intensification of the Euro Area sovereign debt crisis, resulting in a large impact on Germany’s stock of public sector debt through the country’s participation in the various Eurozone 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 EUR35,569, 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 supports Germany’s large trade surplus and has contributed to its significant net international investment position. Healthy private sector balance sheets, as reflected in a modestly indebted household and non-financial corporate sector, enhances the sector’s ability to absorb negative shocks.

The country’s strong fiscal framework supports budget discipline and further enhances its creditworthiness. A “debt brake” rule established in the Constitution stipulates that the cyclically-adjusted deficit for the federal government will be restricted to 0.35% of GDP from 2016 onwards, while the country’s 16 states (the Länder) will be obliged to balance their budgets over the business cycle from 2020 onwards. Various additional fiscal rules and guidelines enacted at the EU and Eurozone level, which were formally transposed into national legislation in 2013, strengthen the fiscal framework. In addition, a fiscal surveillance arm, comprising the Stability Council, provides early warnings when the federal government or any of the German states are at risk of not meeting their fiscal targets.

Moreover, the government’s progress on fiscal consolidation since the crisis, together with its credible plans to reduce its debt to GDP ratio below 60% by 2023 at the latest, underpin Germany’s rating. Healthy budgetary outturns along with reduced interest costs, the winding-down of “bad banks” and its associated liabilities, and an expansion in GDP have been key factors supporting debt reduction in recent years. The government debt to GDP ratio, which peaked at 80.5% in 2010, declined to 74.7% at the end of 2014. DBRS expects continued growth, primary surpluses and low interest rates to buttress the downward trajectory for the debt to GDP ratio over the medium term, 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 corporations’ increasing savings could also bolster investment over the medium-term. The robust performance of the labour market, with unemployment declining further to 5% and employment gains of 0.9% in 2014, and higher real disposable income should support domestic demand. DBRS expects real GDP growth to average 1.6% in 2015-2017.

Despite these strengths, Germany faces a number of challenges. Given the close economic and financial linkages with its Eurozone partners, a re-emergence of the crisis and a protracted recession in Europe could put downside risks to the German growth outlook. With respect to the potential effect of Greece defaulting on its debt, the impact on Germany would be moderate and manageable in DBRS’s view, although growth prospects and confidence could be severely affected by a systemic crisis that spreads beyond Greece. The German exposure to bilateral (Greek Loan Facility) and EFSF loans is already consolidated in the government debt figure, and therefore, overall exposure would likely be unchanged. Nonetheless, government debt could increase if a Greek default were to trigger a capital call from the ECB, but the overall impact would likely be manageable.

An escalation of geopolitical tensions over Ukraine and Russia could also have a negative impact on the German 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. Indeed, economic sentiment has proven sensitive to geopolitical developments. 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, the projected decline in the working-age population poses a significant challenge to Germany’s growth potential, especially in the face of rising 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.

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 Deutsch Bundesbank, Ministry of Finance, German debt agency (Deutsche Finanzagentur), Federal Statistical Office, Stability Council, European Commission, IMF, OECD, 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.

DBRS does not typically accept editorial changes other than to correct for factual, accuracy and/or to remove confidential, material non-public, or sensitive information that might otherwise be inadvertently disclosed.

Lead Analyst: Javier Rouillet, Assistant Vice President
Rating Committee Chair: Roger Lister, Managing Director, Chief Credit Officer, Global FIG and Sovereign Ratings
Initial Rating Date: 11 November 2011
Most Recent Rating Update: 13 February 2015

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