Moody's: Germany's strong economy and fiscal record support credit profile

Germany's large, strong and competitive economy underpins its Aaa stable rating and ensures low funding costs. Its shrinking workforce, ageing population and structural reforms pose key long-term credit challenges, Moody's Investors Service says in its annual Credit Analysis for Germany published today.

The Moody's report is available now on www.moodys.com. Moody's subscribers can access this report via the link provided at the end of this press release. The report is an update to the markets and does not constitute a rating action.
Europe's largest economy benefits from sound governance, high levels of investor confidence and a record of prudent fiscal policies. However, it also faces challenges from demographic factors and the risk, albeit low, of contagion from a resurgent euro area debt crisis.

"Germany has a very large, diversified and highly competitive economy which underpins its Aaa rating with a stable outlook," says Thorsten Nestmann, a Moody's Vice President and author of the report. "Germany enjoys high levels of investor confidence and low funding costs. Its key credit challenges are an ageing population and a declining workforce, which could hold back its potential economic growth and put pressure on its social security systems."

The Moody's report says a renewed euro area debt crisis, e.g. in light of concerns over Greece (Caa1 review for downgrade) leaving the single currency, would be negative for Germany's credit profile. However, contagion risks are lower than in 2012, against the background of institutional improvements in the euro zone and the ECB's more pro-active stance as a lender of last resort.

Germany's direct exposure related to a Greek exit would be manageable, but the German government's creditworthiness would be negatively affected in case large euro area countries such as Italy (Baa2 stable) or Spain (Baa2 positive) were to face increased difficulties again.

The Moody's Credit Analysis evaluates Germany's creditworthiness in terms of Economic Strength, Institutional Strength, Fiscal Strength and Susceptibility to Event Risk - the four main analytical factors in Moody's Sovereign Bond Rating Methodology.
Lower oil prices and a weaker euro will support Germany's already robust economic growth this year, helping the government to keep its budget close to balance and bring down its debt burden.

 Moody's forecasts German real GDP growth of 1.5% in 2015, in line with European Commission estimates.
Germany's workforce is getting smaller and its population is ageing, factors that could undermine its potential for economic growth and put pressure on its social security system. The government's pension and labour market reforms could also undermine its competitiveness and strain the public finances.

The Moody's report says Germany's susceptibility to geopolitical event risk is very low. The most tangible geopolitical risk currently is the Russia/Ukraine crisis. However, the effects of the crisis on the German economy do not pose a significant risk to its rating.

Germany's stable outlook reflects its progress towards fiscal consolidation -- it was one of the few European Union countries to record a small general government budget surplus in 2014. It also takes account of the declining risks from the German banking system for the sovereign's balance sheet.