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Erste Group Research Credit Report | Government Bonds | Austria 4 January 2012

Credit Report: Republic of Austria


Adrian Beck adrian.beck@erstegroup.com Gudrun Egger gudrun.egger@erstegroup.com

Fitch Moody's S&P AAA Aaa AAA Outlook stable stable watch neg.

Robust economy and institutions, high competitive strength. Measured in terms of GDP per capita (EUR 34,100), Austria is one of the euro zones most prosperous countries with a strong and diversified economy and above-average long-term growth rates. The countrys high competitive strength is evidenced by the positive current account balance since 2002. Another major advantage of Austria is the strength of its institutions and the resulting social and political stability. Flexible labour market. The Austrian labour market boasts a highly educated and competitive workforce. At 4.1%, the unemployment rate is one of the lowest in the EU, even though this is owed to some extent to a low effective retirement age. GDP growth subdued in 2012, set to pick up again in 2013. Since early 2011, GDP has exceeded its pre-crisis level. Continuing uncertainty over the sovereign debt crisis in the euro zone is expected to dampen growth in 2012. For the coming years, we project above-average growth (2012e: 0.9%; 2013e: 2.0%), which should be supported mainly by net exports and household consumption. Low debt. In Austria, both private household debt and public debt are below the euro zone average. The biggest risk is posed by a future inclusion of extra-budgetary debt in debt statistics. A so-called debt brake should make fiscal consolidation mandatory, however. Aaa ratings from all agencies. Austrias greatest strengths include its long-lasting social and political stability, a highly educated workforce, and a diversified economy. Among the risk factors are the Austrian banks' exposure to CEE and hived-off debt. The biggest risk for a downgrade comes from systemic risk in the euro zone. Low funding risk, stable yields. Efficient management of public debt funding is reflected by the well-balanced maturity profile and the low funding risk. Austrias spread over German Bunds (10y) is currently around 115 bps, which is significantly above the long-term average and that of comparable triple-A issuers, which appears unjustified.

Source: Bloomberg, Erste Group Research

Key figures
Population (mn.) GDP growth (%) Inflation (%) Unemployment (%) Govt. deficit* Govt. debt* 2010 8.4 2.3 1.7 4.4 4.4 71.8 2011 2012F 2013F 8.4 8.5 8.5 3.3 0.9 2.0 3.3 2.4 1.9 4.2 4.4 4.4 3.1 2.9 2.8 72.5 74.0 74.0

* percent of GDP Source: Statistics Austria, Erste Group Research

Table of contents Diversified economy Flexible labour market Above-average GDP growth Low debt Top ratings Low funding risk Stable yields

2 5 6 8 10 12 13

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Erste Group Research Credit Report | Government Bonds | Austria 4 January 2012

Diversified economy
Robust economy and institutions, strong competitive position.
Austria has a strong and diversified economy without any major imbalances. Nominal GDP amounted to EUR 286.2 billion in 2010, which is an economic output of EUR 34,100 per capita. This makes Austria one of the most prosperous countries of the euro zone. Adjusted for purchasing power, economic output per inhabitant was 17% above the euro area average and 7% higher than Germany's. According to Eurostat, actual 1 individual consumption was 8% above the euro zone average. The basis for this prosperity is a well-balanced and well-diversified economy. Furthermore, there are no signs of any general overheating of the real estate market. High expenditure on research and development (2.8% of GDP in 2010) and the resulting innovation process as well as a highly skilled and flexible workforce make the Austrian economy one of the most competitive of the euro area. Above-average GDP per capita Nominally and in purchasing power standards, EUR 000s, 2010
40 35 30 25 20
110 110 100 90 80 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 residential property price index consumer price index

Moderate rise in real estate prices Real estate price index excluding Vienna
150 140 130 120 150 140 130 120

15 10 5 0 Austria Germany PPS France nominal Italy Eurozone Spain

100 90 80

Source: Eurostat, Erste Group Research

Source: OeNB, Erste Group Research

Prosperity is based on above-average GDP growth. At an average of 1.6% p.a. in real terms over the past ten years, GDP grew faster than the euro area average (1.2%) and Germanys GDP (0.9%). After contracting in 2009 (-3.8%), the domestic economy quickly recovered and has been operating above its pre-crisis level since the beginning of 2011. At a forecasted +3.3%, GDP growth was again above the average in 2011 and surpassed general expectations. In the first three quarters of 2011, domestic economic output was up 3.9% over the same period of the previous year, while growth in the euro zone was running at a rate of only 1.8% and in neighbouring Germany at 3.5% over the same period.

1 Actual individual consumption consists of goods and services consumed by private households regardless of who bought or paid for them.

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Erste Group Research Credit Report | Government Bonds | Austria 4 January 2012

Above-average long-term growth Development of GDP, real and sadj., 2005=100

115 110 105 100 95 90 Q1 2006 Q3 2006 Q3 2007 Q3 2009 Q1 2011 Q1 2005 Q3 2005 Q1 2007 Q1 2008 Q3 2008 Q1 2009 Q1 2010 Q3 2010 Q3 2011 115 110 105 100 95 90

Exports and consumption are key contributors to GDP Expenditure components, nominal values 2010
net exports; 4.3% investment; 21,6%

private consumption; 54.5%

government spending; 19.4%




Source: Eurostat, Erste Group Research

Source: Statistics Austria, Erste Group Research

Net exports and domestic demand are key drivers of growth. After the economic crisis of 2009, which saw a downturn especially in investment activity and exports, these two components as well as household consumption were the key drivers behind the rebound of GDP. Investment activity, exports and household consumption are key growth drivers in Austria Contribution to real yoy GDP growth by component
8.0% 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% -6.0% -8.0%

Development of expenditure In real terms and seasonally adjusted, in EUR million

45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000

Q4 2005

Q2 2006

Q4 2008

Q2 2009

Q2 2011

Q2 2005

Q4 2006

Q2 2007

Q4 2007

Q2 2008

Q4 2009

Q2 2010

Q4 2010

0 Q1 2005 Q3 2006 Q1 2008 Q3 2009 Q1 2011 Q3 2011 Q3 2005 Q1 2006 Q1 2007 Q3 2007 Q3 2008 Q1 2009 Q1 2010 Q3 2010

priv. consumption net exports

gross investment GDP

publ. consumption

private consuption

government spending




Source: Eurostat, Erste Group Research

Source: Eurostat, Erste Group Research

International competitiveness and low currency risk. Due to the pegging of the schilling to the currency of Austria's most important trading partner Germany in 1980 and Austrias subsequent joining of the euro zone, the countrys real effective exchange rate i.e. the weighted and price-adjusted exchange rate has been stable over the past decades. As more than half of Austrian exports go to the euro zone, most of these exports are unaffected by exchange rate fluctuations, which strengthens the stability of the export sector even further. In 2002, the current account balance turned positive. The constant contribution of net exports to GDP is evidence of Austrias international competitive strength. Moreover, Austria is a net investor internationally and hence less dependent on capital imports than other countries. In view of this constancy and continuity, Austria is clearly one of the hard currency countries within the euro zone.

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Erste Group Research Credit Report | Government Bonds | Austria 4 January 2012

Current account surplus since 2002 Current account balance, in EUR million
16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 -2,000 -4,000 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Constant and high competitive strength Real effective exchange rate (CPI), 2005=100
130 120 110 100 90 80 70 60 50 01/1980 130 120 110 100 90 80 70 60 50 01/1985 01/1990 Austria 01/1995 01/2000 01/2005 Germany 01/2010 Eurozone

Source: OeNB, Statistics Austria, Erste Group Research

Source: OECD, Erste Group Research

Strength of institutions underpins social and political stability. Austria has a transparent and efficient public sector and a strong record on the rule of law. This is also reflected by top ratings in international rankings, among them, for example, the World Banks ranking of government effectiveness, which measures public sector quality and independence and the rule of law index of the World Bank, which measures the degree to which people have confidence in and abide by the rule of law. The political system is consistently stable and of high transparency. The grand coalition of Social Democrats (SP) and Conservatives (VP) that has been in power since 2008 holds 59% of the seats in the National Council (lower house of parliament) and has sufficient capacity to act. The coalition is moreover seeking to keep the budget deficit, which has traditionally been low (less than 2% on the average 2000-2010), on a fiscal consolidation path.

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Erste Group Research Credit Report | Government Bonds | Austria 4 January 2012

Flexible labour market

Austria boasts a highly educated and competitive workforce. This enabled the country to cope with the economic crisis of 2009 with only a slight rise in unemployment. This was facilitated by short-time work programmes, which allowed businesses to respond flexibly to falling orders. 2 The long-standing and proven social partnership system combined with the traditionally low strike rates also contributed to the strong competitive position that the Austrian economy enjoys internationally. This is reflected in particular by moderate wage rises and the resulting moderate development of unit labour costs and above-average labour productivity. Above-average rise in productivity Real labour productivity per employee, index
115 113 111 109 107 105 103 101 99 97 95 Q4 2003 Q3 2004 Q2 2008 Q1 2009 Q4 2009 Q1 2000 Q4 2000 Q3 2001 Q2 2002 Q1 2003 Q2 2005 Q1 2006 Q4 2006 Q3 2007 Q3 2010 115 113 111 109 107 105 103 101 99 97 95

Moderate development of unit labour costs In real terms, index 2000=100

110 108 106 104 102 100 98 96 94 92 90 Q4 2000 Q2 2002 Q3 2004 Q4 2006 Q1 2009 Q2 2011
14 12 10 8 6 4 2 0

110 108 106 104 102 100 98 96 94 92 90 Q1 2000 Q1 2003 Q4 2003 Q3 2001 Q2 2005 Q1 2006 Q3 2007 Q2 2008 Q4 2009







Source: Eurostat, Erste Group Research

Source: Eurostat, Erste Group Research

Austrias harmonised unemployment rate currently stands at 4.1%. However, this low level of unemployment is attributable in part to a low effective retirement age (acc. to OECD: 58.9 years). In this regard, the federal government already announced that the practice of early retirement at Austrias state railways (with a workforce of 44,000 one of Austrias largest employers) would be discontinued as of the beginning of 2012. Measures of this kind are definitely welcome in our opinion, with a view to efficient fiscal consolidation and a long-term decline in total debt. Lowest unemployment rate in the EU Harmonised unemployment rate, in %

Long-term unemployment rate is stable and low Harmonised unemployment rate, in %

14 12 10



8 6


4 2 0





Source: Eurostat, Erste Group Research

Source: Eurostat, Erste Group Research

Erste Group Research Credit Report

2 It consists of the Chambers of Commerce, Agriculture and Labour and the Austrian Trade Union Federation. Page 5














Q3 2010

Erste Group Research Credit Report | Government Bonds | Austria 4 January 2012

Above-average GDP growth

GDP growth subdued in 2012, expected to pick up again in 2013
The continuing anxiety caused by the euro zones sovereign debt crisis and the resulting uncertainty over the future development of the economy are weighing on consumer and manufacturer sentiment. Implementation of the measures agreed at the European level and further steps towards a resolution of the sovereign debt crisis might slowly restore confidence in the nd 2 half of 2012. Accordingly, we expect a more pronounced economic recovery in 2013. Moderate external demand expected for 2012 amid slowdown of global growth. After the 2009 crisis, exports recovered briskly, with Germany remaining the key export market with a share of more than 30%. In the second half of 2011, export momentum slowed a little but remained at a solid level. Because of the global slowdown of growth, (net) exports should make a significantly more moderate contribution to GDP than last year. For 2013 we expect growth to pick up, though.

Euro zone is Austria's key export market Export markets January-September 2011
Asia 9.1% Oceania 0,6%

Focus of goods exports Goods exported January-September 2011

other manuf. goods 11.3% other goods 2.8% food 5.2% crude materials 3.3% mineral fuels, lubricants 3.2% chemicals and related products 12.8%

America 7.5% Africa 1.2% rest of Europe 6.8% Switzerland 4.8%

Germany 31.3%

Italy 7.6% rest of EU 16.8% rest of Eurozone 14.3%

machinery and transport equipment 37.6%

manufactured goods 23.7%

Source: Statistics Austria, Erste Group Research

Source: Statistics Austria, Erste Group Research

Household consumption supports the economy. With a 55% share of GDP, household consumption is the largest expenditure component and has developed solidly over the past few years. Even in 2009, household consumption contributed to GDP (-3.8%) stabilisation with low negative growth of -0.3% yoy. Low unemployment and the rise in real wages over recent years probably contributed to the solid performance of household consumption. Additional support has come from the decline in the savings ratio since 2009. Next year, inflation should subside a little and real wages are expected to rise. With consumer sentiment clouding, one may assume however, that household consumption will tend to be subdued in 2012 before picking up more vigorously in 2013.

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Erste Group Research Credit Report | Government Bonds | Austria 4 January 2012

Savings ratio slightly down Private households savings ratio

20 18 16 14 12 10 8 6 4 2 0 2001Q1 - 2001Q4 2002Q3 - 2003Q2 2004Q1 - 2004Q4 2005Q1 - 2005Q4 2006Q3 - 2007Q2 2007Q3 - 2008Q2 2009Q1 - 2009Q4 2001Q3 - 2002Q2 2002Q1 - 2002Q4 2003Q1 - 2003Q4 2003Q3 - 2004Q2 2004Q3 - 2005Q2 2005Q3 - 2006Q2 2006Q1 - 2006Q4 2007Q1 - 2007Q4 2008Q1 - 2008Q4 2008Q3 - 2009Q2 2009Q3 - 2010Q2 2010Q1 - 2010Q4 2010Q3 - 2011Q2

Moderate rises in real wages Gross wages/full-time equivalent inflation, in % yoy

3.0 2.5 2.0 1.5 1.0 0.5 0.0 -0.5 -1.0 -1.5 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Source: Statistics Austria, Erste Group Research

Source: OeNB, Erste Group Research

Uncertainty weighs on investment activity. It is especially the uncertainty regarding consumer demand that might cause businesses to postpone capital spending next year. We therefore do not anticipate any substantial contribution of investment activity to 2012 GDP. The emerging dip in investment activity should then be followed in 2013 by a rebound and might then make a superproportionately large contribution to aggregate growth owing to catch-up effects.

Investment growth expected to slow in Austria Investment activity and manufacturer sentiment (AT)
110 108 106 104 102 100 98 96 94 92 90 02/2000 02/2002 02/2004 02/2006 02/2008 02/2010 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% -6.0% -8.0% -10.0% gross fixed capital formation y/y (rhs)

Retail sales may decline Retail sales index and consumer sentiment (AT)
110 108 106 104 102 100 98 96 94 92 90 01/2000 -4% 01/2002 01/2004 01/2006 01/2008 01/2010 OECD Consumer Confidence retail sales index y/y (rhs) 0% -2% 2% 6% 4% 8%

OECD Industrial Confidence

Source: OECD, Eurostat, Erste Group Research

Source: OECD, Eurostat, Erste Group Research

Overall, the Austrian economy will not be able to escape the impacts of the debt crisis. Against the backdrop of declining external demand and subdued domestic demand, we expect the economy to grow at a rate of 0.9% in 2012. In 2013, economic growth should accelerate again to 2.0%.

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Erste Group Research Credit Report | Government Bonds | Austria 4 January 2012

Low debt
In the private sector, the relative debt levels of both private households and businesses are significantly below the euro zone average. Moreover, the high savings ratio and the resulting high levels of privately held assets (which according to OeNB amount to about 175% of GDP) provide adequate funding to both the corporate sector and the state, which traditionally is a net debtor. Debt below euro zone average Loans with short and long maturities, other fin. Instr., in % of GDP (2010)
120% 100% 80% 60% 40% 20% 0% corporate Austria household Eurozone

Source: OeNB, ECB, Erste Group Research

At 72.2% of GDP, Austrias public debt is lower than Germanys (81.7%) and lower than the euro zone average (88.0%). Strict control of expenditure and a good economic development have kept total debt within limits during the crisis years. Austrias debt is lower than that of other states Comparison of key debt ratios (in % of GDP)
gross debt deficit Country 2011 2012 2013 2011 2012 Austria 72.2 73.3 73.7 -3.4 -3.1 Eurozone 88.0 90.4 90.9 -4.1 -3.4 Germany 81.7 81.2 79.9 -1.3 -1.0 Finland 49.1 51.8 53.5 -1.0 -0.7 France 85.4 89.2 91.7 -5.8 -5.3 Greece 162.8 198.3 198.5 -8.9 -7.0 Ireland 108.1 117.5 121.1 -10.0 -8.6 Italy 120.5 120.5 118.7 -4.0 -2.3 Netherlands 64.2 64.9 66.0 -4.3 -3.1 Portugal 101.6 111.0 112.1 -5.8 -4.5 Spain 69.6 73.8 78.0 -6.6 -5.9 Source: European Commission (Autumn Forecast), Erste Group Research 2013 -2.9 -3.0 -0.7 -0.7 -5.1 -6.8 -7.8 -1.2 -2.7 -3.2 -5.3

The inclusion of extra-budgetary debt might increase public debt levels. Even though the Austrian state's current total debt is lower than Germany's or the euro zone's, the level of public debt might increase. In March 2011, reclassifications triggered by changes in the European System of Accounts (ESA) resulted in an upward revision of Austrias public debt by 3.4 percentage points (in terms of GDP). This was mainly attributable to the inclusion of debt incurred by BB (the state railways) and public hospitals.
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Erste Group Research Credit Report | Government Bonds | Austria 4 January 2012

Another ESA reform in 2014 might result in further entities being reincluded in public debt data. According to the Austrian State Debt Committee, the long-term liabilities of public-sector companies (which are offset in part by assets) amount to more than EUR 30 billion. Their inclusion would drive up public debt by another 11% of GDP. In addition, the debts of previously hived-off companies may have to be recognised at Laender or local government level. However, a change in these rules would affect all EU member states equally. It is therefore to be expected that in such a case hived-off debt would also have to be recognised in other countries. So-called debt brake is expected to limit new debt. To counteract a further rise in public debt, the Austrian federal government agreed in December 2011 to establish a debt limit by passing a regular law designed to guarantee fiscal consolidation. As of the financial year 2017, this law will limit the federal government's structural deficit to 0.35% of GDP. Additionally, a limit of 0.1% agreed with Laender and local governments is to ensure long-term consolidation at these levels as well. The debt limit adopted at the European level provides for a maximum structural deficit of 0.5% of GDP, which should be written into the constitution by the end of 2012. As Austrias structural deficit in 2011 run at 3.1% of GDP according to European Commission estimates, major consolidation efforts will be needed over the medium term to attain the targets set. From our perspective, there is much scope and need to act in the healthcare and pensions sectors. Raising the effective retirement age might contribute to cutting the structural deficit to the required level. In addition, there is potential for cutting spending in public administration and expenditure on subsidies and funding programmes.

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Erste Group Research Credit Report | Government Bonds | Austria 4 January 2012

Top ratings
Austria has received top marks from all of the three rating agencies. Moodys and Fitch added that the outlook remains stable, while Standard & Poor's lowered the outlook for Austria and all of the five other triple-A countries of the euro zone (Germany, France, Finland, Netherlands, Luxembourg) to credit watch negative in view of the euro zones systemic risk. The rating agency Moodys confirmed Austrias top rating and the stable outlook on 23 December 2011. The agency noted, however, that the stable outlook depended increasingly on a resolution of the euro zone crisis. Credit ratings of the Republic of Austria Top ratings from all major agencies
Agency Moody's Standard and Poor's Fitch debt long-term since short-term P-1 1999 Aaa A-1+ 1986 AAA F1 1995 AAA outlook since 1977 stable 1975 watch neg. 1994 stable

Source: Bloomberg, Erste Group Research

Among Austrias key strengths, the rating agencies name primarily its long-term social and political stability, the highly skilled workforce, and the well-diversified economy. They additionally emphasise the traditionally prudent management of fiscal resources. Moodys awarded top marks in three out of four sub-categories, and only deducted a point for susceptibility to risks, highlighting two core risks (see next page). Best marks for economic resilience and financial strength Moodys rating
Economic Strength very high high moderate low very low Economic Resiliency How strong is the economic structure?

Institutional Strength

How robust are the istitutions and how predictable are the policies? very high high moderate low very low

Financial Strength

How does the debt burden compare with the government's resource mobilization capacity? very high high moderate low very low


Susceptibility to event risk

What is the risk of a direct and sudden threat to debt repayment? very low low moderate high very high

Financial Robustness

Source: Moodys, Erste Group Research

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Erste Group Research Credit Report | Government Bonds | Austria 4 January 2012

1) The exposure of Austrian banks in Central and Eastern Europe, which is classified by Moodys as generally manageable. According to the Austrian central bank (OeNB), consolidated claims of Austrian banks to countries in the region amounted to about EUR 224 billion in Q1 2011. However, these assets were broadly diversified across countries, which helps to limit risk. In addition, these assets are accompanied by deposits with banks. On average, loans to non-banks are funded 92% by local deposits. Nonetheless, to counter this risk, OeNB and Austrias Financial Market Authority adopted a package of measures designed to strengthen the sustainability of Austrian banks operations in CEE and to provide for implementation of the Basel III rules from as early as 1 January 2013. The package also calls for the loan-to-deposit ratio of new business not to exceed 110% and for an additional core capital buffer of up to 3%. The Austrian banks generally already boast a solid equity base. At mid2011, the consolidated core capital ratio of all Austrian banks subject to reporting obligations was 10.3%. The loan-to-deposit ratio of 109% and the solvency ratio of 13.5% likewise reflect the Austrian banks, on average, 3 robust capitalisation. 2) Hived-off debt is a potential risk factor. By introducing the debt limit mentioned above, the government reacted, indirectly, to this second core risk and took steps to contain total debt levels. Austria thus met a characteristic criterion of Aaa countries, namely the ability to implement measures quickly and resolutely when problems emerge. Both measures were noted positively by the rating agencies. Risks leading to a downgrading might materialise if the credit metrics were to deteriorate substantially and permanently and/or if at-risk euro zone states would default on payments temporarily and a series of exits from the euro zone. In the latter case, the ratings of other euro member states holding triple-A ratings would be at risk as well, however.

Source: OeNB: Facts on Austria and its Banks (October 2011) Page 11

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Erste Group Research Credit Report | Government Bonds | Austria 4 January 2012

Low funding risk

Efficient management of public debt funding and well-balanced 4 maturity profile. Austria's low debt-rollover ratio (4.8%) and the average residual maturity of 8.4 years reflect the countrys low funding risk and sound diversification of the maturity profile. The countrys strong debt servicing capacity can be seen from its low interest expenditure relative to public revenues (6%). Relative to GDP, Austrias interest expenditure is likewise low at 2.7% (EZ: 3.0%). The state raises funds mainly by issuing euro-denominated bonds, 97% have fixed interest payments. In 2009, gross issuance volume was EUR 33 billion, in 2010 and 2011 27 and 21 billion, respectively. In 2012, one or two syndicated bond issues are being planned with a total volume of between EUR 27 and 30 billion. Well-balanced maturity profile Bonds and money-market paper at current ex. rates
30,000 25,000 20,000 15,000 10,000 5,000 0

Bonds are an important funding instrument Federal government debt as of Nov. 11

loans banks and insurances (Euro) 7.6% treasury bills (Euro) 2.1% rest (Euro) 1.3% foreign currency debt 1.4%















bonds (Euro) 87.6%

Source: Bloomberg, Erste Group Research

Source: OeBFA, Erste Group Research

Well-diversified creditor pool with slightly falling percentage of external debt. About 80% of Austrian government bonds are held in the euro zone "home market", primarily in stable regions such as Austria, Germany, and France. Euro area as core market Syndicated RAGB emissions 2008-2011
Austria rest of Eurozone rest of Europe Asia Africa America Middle East 0% 10% 20% 30% 40% 50% 60% Insurances and pens. funds retail

Investors with preference for safe assets Creditors by category (RAGB 2008-2011)

asset managers central banks & int. org.

other 0% 5% 10% 15% 20% 25% 30% 35%

Source: OeBFA, Erste Group Research

Source: OeBFA, Erste Group Research

Erste Group Research Credit Report

Last years issues with short maturities plus this years maturing medium and long-term debt relative to GDP. Page 12

Erste Group Research Credit Report | Government Bonds | Austria 4 January 2012

Stable yields
Yield spread over Germany has potential for narrowing
Continuing uncertainty and low interest rates weigh on benchmark yields. While the prospect of further rate cuts depresses yield levels, the euro zone's sovereign debt crisis gives rise to short-term fluctuations reflecting whether efforts to find a solution make progress or suffer setbacks. As we do not expect a big "final resolution" of the sovereign debt crisis but a series of small steps in a continuing "work in progress" process, yields may expected to be volatile in the near future. With rate expectations low, we forecast that yields on 10-year Germans Bund will rise only very moderately over a period of one year.

Low key interest rate depresses yields Forecast of euro zone benchmark yields (%)
2.5 2 1.5 1 0.5 0 2 3 4 Current 5 Mar. 12 6 Jun.12 7 Sep.12 8 9 Dec.12 10

Source: Bloomberg, Erste Group Research

If systemic risks emerge in the euro zone, benchmark yields may rise. Rating agencies have recently increasingly stressed the systemic risk in the euro zone. Rating downgrades would indeed render bailout operations more difficult. If investors become increasingly concerned about the euro zone, the yields of German Bunds might rise.
Yield spreads over DE, in bps
Austria Finland France Netherlands current 115 48 134 39 median 10y 11.2 10.8 8.0 9.9

Source: Bloomberg, Erste Group Research

Debt ratios AT, FR

Austria France deficit -3.4 -5.8 gross debt 72.2 85.4

Source: European Commission

Austrian yield spread has potential to narrow. A look at the yield spreads of selected triple-A countries over Germany in the chart below reveals a similar pattern for Austria (recently 115 bps) and France (134 bps). From our point of view, however, Austria enjoys a number of advantages over France, though. Moodys, for example, commended Austria for its long periods of fiscal restraint and low deficits, while criticising Frances relative high levels of government expenditure and public debt. France has indeed one of the worst sets of credit ratios among the triple-A states. With regard to France, Moody's also underlines that the country unlike Austria will feel a negative effect from the global economic slowdown. Moreover, France has a higher funding risk with a significantly higher debt-rollover ratio of 14% (Austria: 4.8%). For fundamental reasons, it therefore does not seem justified that Austrias yield spread should be of a similar size as France's.
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Erste Group Research Credit Report | Government Bonds | Austria 4 January 2012

The yield spreads of other comparable triple-A issuers such as the Netherlands or Finland currently range from 39 to 48 basis points. In our opinion, the Austrian yield spread therefore has potential for further narrowing.

Widening of yield spreads Premium over German Bunds, 10y

2.0 2.0

Significant widening in 2009 and 2011 Premium over German Bunds, 10y


1.5 1.4



1.0 0.6 0.2

average since 1999



0.0 01/2011 04/2011 01/2010 07/2010 10/2010 04/2010 01/2012 07/2011 10/2011

0.0 -0.2 2000 2005 2011 1999 2001 2002 2003 2004 2006 2007 2008 2009 2010





Source: Bloomberg, Erste Group Research

Source: Datastream, Erste Group Research

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Erste Group Research Credit Report | Government Bonds | Austria 4 January 2012

Group Research
Head of Group Research Friedrich Mostbck , CEFA Macro/Fixed Income Research Head: Gudrun Egger, CEFA (Euroland) Adrian Beck (AT, SW) Mildred Hager (US, JP, Euroland) Alihan Karadagoglu (Corporates) Peter Kaufmann (Corporates) Carmen Riefler-Kowarsch (Covered Bonds) Elena Statelov, CIIA (Corporates) Macro/Fixed Income Research CEE Co-Head CEE: Juraj Kotian (Macro/FI) Birgit Niessner (Macro/FI) CEE Equity Research Co-Head: Gnther Artner, CFA Co-Head: Henning Ekuchen Gnter Hohberger (Banks) Franz Hrl, CFA (Steel, Construction) Daniel Lion, CIIA (IT) Christoph Schultes, CIIA (Insurance, Utility) Thomas Unger; CFA (Oil&Gas) Vera Sutedja, CFA (Telecom) Vladimira Urbankova, MBA (Pharma) Martina Valenta, MBA (Real Estate) Gerald Walek, CFA (Machinery) International Equities Hans Engel (Market strategist) Stephan Lingnau (Europe) Ronald Stferle (Asia) Editor Research CEE Brett Aarons Research, Croatia/Serbia Head: Mladen Dodig (Equity) Head: Alen Kovac (Fixed income) Anto Augustinovic (Equity) Iv ana Rogic (Fixed income) Davor Spoljar, CFA (Equity) Research, Czech Republic Head: David Navratil (Fixed income) Petr Bittner (Fixed income) Petr Bartek (Equity) Vaclav Kminek (Media) Jana Krajcova (Fixed income) Martin Krajhanzl (Equity) Martin Lobotka (Fixed income) Lubos Mokras (Fixed income) Research, Hungary Head: Jzsef Mir (Equity) Bernadett Papp (Equity) Gergely Gabler (Equity) Zoltan Aroks zallasi (Fixed income) Research, Poland Tomasz Kasowicz (Equity) Piotr Lopaciuk (Equity) Marek Czachor (Equity) Research, Romania Head: Lucian Claudiu Anghel Head Equity: Mihai Caruntu (Equity) Dorina Cobiscan (Fixed Income) Dumitru Dulgheru (Fixed income) Eugen Sinca (Fixed income) Raluca Ungureanu (Equity) Research Turkey Head: Erkin Sahinoz (Fixed Income) Sevda Sarp (Equity) Evrim Dairecioglu (Equity) Ozlem Derici (Fixed Income) Mehmet Emin Zumrut (Equity) +43 (0)5 0100 - 11902 +43 +43 +43 +43 +43 +43 +43 (0)5 0100 (0)5 0100 (0)5 0100 (0)5 0100 (0)5 0100 (0)5 0100 (0)5 0100 - 11909 - 11957 - 17331 - 19633 - 11183 - 19632 - 19641 Research, Slovakia Head: Juraj Barta, CFA (Fixed income) Sona Muzikarova (Fixed income) Maria Valachyova (Fixed income) Research, Ukraine Head: Maryan Zablotskyy (Fixed income) Ivan Ulitko (Equity) Igor Zholonkivsk yi (Equity) +421 2 4862 4166 +421 2 4862 4762 +421 2 4862 4185 +38 044 593 - 9188 +38 044 593 - 0003 +38 044 593 - 1784

Treasury - Erste Bank Vienna

Saving Banks & Sales Retail Head: Thomas Schaufler Equity Retail Sales Head: Kurt Gerhold Fixed Income & Certificate Sales Head: Uwe Kolar Treasury Domestic Sales Head: Markus Kaller Corporate Sales AT Head: Christian Skopek Institutional Sales International Head: Christoph Kampitsch Institutional Sales Austria Head: Thomas Almen Martina Fux Michael Konczer Marc Pichler Institutional Solutions Head: Zachary Carvell Brigitte Mayr Mikhail Roshal Institutional & High End Sales Head: Patrick Lehnert Antony Brown Abdalla Bachu Lukash Beeharry Ulrich Inhofner Margit Hraschek Institutional Sales Germany Head: Jrgen Niemeier Marc Friebertshuser Sven Kienzle Michael Schmotz Sabine Loris Carsten Demmler Jrg Moritzen Rene Klasen Klaus Vosseler Milosz Chrustek Andreas Goll Mathias Gindele Institutional Sales CEE Head: Jaromir Malak Sales CEE Pawel Kielek Piotr Zagan Ciprian Mitu Institutional Sales Slovakia Head: Peter Kniz Sarlota Sipulova Institutional Sales Czech Republic Head: Ondrej Cech Pavel Zdichynec Milan Bartos Radek Chupik Institutional Sales Croatia Head: Darko Horvatin Natalija Zujic Institutional Sales Hungary Norbert Siklosi Institutional Sales Romania Head: Valentin Popovici Ruxandra Carlan +43 (0)5 0100 - 84225 +43 (0)5 0100 - 84232 +43 (0)5 0100 - 83214 +43 (0)5 0100 - 84239 +43 (0)5 0100 - 84146

+43 (0)5 0100 - 17357 +43 (0)5 0100 - 18781 +43 +43 +43 +43 +43 +43 +43 +43 +43 +43 +43 (0)5 0100 (0)5 0100 (0)5 0100 (0)5 0100 (0)5 0100 (0)5 0100 (0)5 0100 (0)5 0100 (0)5 0100 (0)5 0100 (0)5 0100 - 11523 - 19634 - 17354 - 18506 - 17420 - 16314 - 17344 - 11905 - 17343 - 11913 - 16360

Fixed Income & Credit Institutional Sales

+43 (0)5 0100 - 84979 +43 (0)50100 - 84323 +43 (0)50100 - 84113 +43 (0)50100 - 84121 +43 (0)50100 - 84118 +43 (0)50100 - 83308 +43 (0)50100 87481 +43 (0)50100 87487 +43 (0)5 0100 - 84259 +44 20 7623 - 4159 +44 20 7623 - 4159 +43 (0)50100 - 84125 +43 (0)50100 - 84324 +43 (0)50100 - 84117 +43 (0)50100 - 85503 +43 (0)50100 - 85540 +43 (0)50100 - 85541 +43 (0)50100 - 85542 +43 (0)50100 - 85543 +43 (0)50100 - 85580 +43 (0)50100 - 85581 +43 (0)50100 - 85521 +43 (0)50100 - 85560 +43 (0)50100 - 85522 +43 (0)50100 - 85561 +43 (0)50100 - 85562 +43 (0)50100 - 84254 +48 22 538 62 23 +43 (0)50100 - 84256 +43 (0)50100 - 84253 +421 2 4862-5624 +421 2 4862-5629 +420 2 2499 - 5577 +420 2 2499 - 5590 +420 2 2499 - 5562 +420 2 2499 - 5565 +385 (0)6237 - 1788 +385 (0)6237 - 1638 +36 1 235 - 5842 +40 21 310-4449 - 59 +40 21 310-4449 - 612

+43 (0)5 0100 - 19835 +43 (0)5 0100 - 16574 +43 (0)5 0100 - 11723 +420 956 711 014 +381 11 22 +385 62 37 +385 62 37 +385 62 37 +385 62 37 09 178 1383 2833 2419 2825 439 172 227 289 232 434 192 456

+420 224 995 +420 224 995 +420 224 995 +420 224 995 +420 224 995 +420 224 995 +420 224 995 +420 224 995

+361 235-5131 +361 235-5135 +361 253-5133 +361 373-2830 +48 22 330 6251 +48 22 330 6252 +48 22 330 6254 +40 +40 +40 +40 +40 +40 +90 +90 +90 +90 +90 37226 1021 21 311 2754 37226 1028 37226 1029 37226 1026 21311 2754 212 371 2540 212 371 2537 212 371 2535 212 371 2536 212 371 2539

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Erste Group Research Credit Report | Government Bonds | Austria 4 January 2012

This Analysis (the Report) was prepared by Erste Group Bank AG (the Erste Group) to provide its clients with additional background information about the Republic of Austria (the Country). This Report is based on the level of knowledge of the person entrusted with their compilation on the date of this Report and is subject to change without notice. It is being furnished solely for general information and does neither constitute an investment advise or recommendation nor an offer, solicitation or recommendation of any offer, to subscribe, to buy or sell or to participate in the financial instrument referred to herein or in any financial instruments that relates to the Country (collectively the Financial Instrument) or to engage in any trading strategy involving them. All illustrations, analyses and conclusions contained herein are of a general nature. This Report neither provides a full and complete overview of the transaction itself, the potential risks and consequences, nor take into account the individual circumstances and needs of any particular investors regarding income, taxes and risk tolerance, or whether the Financial Instrument is a suitable investment for them. It therefore must not be regarded as a substitute for obtaining individual advise. The illustrated market performance and sample calculations cannot provide reliable predictions about the future performance. Past performance is not necessarily indicative for future performances and transactions in financial instruments can be considered risky or speculative. The lower the credit rating of the issuer is, the higher is the risk of the investment. Since not all transactions are suitable for every investor, prior to the entering into any transaction the investor shall consult its independent advisors (including but not limited to legal and tax advisor), to make sure that, irrespective of the information herein, the planned investment fits into the investors needs and preferences and that the involved risks are fully understood by the investor and that after due consideration the investor is convinced that s/he wish to enter into the planned transaction, is able to do so and can bear the economic consequences. The Austrian Securities Supervision Act 2007 customer information must be taken into account by the investor. Financial analyses, if conducted by our Financial Analysis department, are in compliance with all legal requirements. The authors of this Report have no authority to make any representation or warranty on behalf of the Subject, Erste Group, or any other person. Although the information herein has been obtained from, and any opinions herein are based upon, sources believed reliable, Erste Group (including its employees and/or representatives) makes no representation and warranty, express or implied, to the accuracy, completeness and correctness of the information, opinions, analysis or conclusion in this Report. Neither Erste Group nor any of its employees and/or representatives, nor any other person shall be liable for any losses or damages whatever its nature is (including but not limited to any direct, indirect or consequential loss or loss of profit) and which may result from reliance upon this Report. No part of the authors compensation was, is or will be directly or indirectly related to the specific views contained in this Report. From time to time, Erste Group, companies affiliated with it and the principals or employees of Erste Group and its affiliates respectively may have a position in the Financial Instrument or hold options, warrants or rights with respect thereto or other financial instruments of such issuers and may make a market or otherwise act in transactions in any of these financial instruments. Erste Group, companies affiliated with it and/or the principals or employees of Erste Group and/or its affiliates may from time to time provide investment banking or consulting services to the Country. The distribution of this Report and the Financial Instrument is restricted or prohibited in certain jurisdiction such as, inter alia, Australia, Canada, Great Britain, Japan and the United States of America. In particular, this Report may not be distributed and the Financial Instrument may not be offered or sold within the United States of America or to, or for the account or benefit of, any U.S. Persons (as defined in Regulation S under the U.S. Securities Act of 1933 as amended) unless an exemption under U.S. law or the state laws in the United States is applicable. Persons into whose possession this Report comes are required by Erste Group to inform themselves about and to observe such restrictions. Additional information can be obtained from Erste Group upon request. Erste Group is not a registered broker-dealer under the U.S. Securities Exchange Act of 1934, as amended, or under applicable state laws in the United States. Erste Group Bank AG is regulated by the Financial Service Authority for the conduct of investment business in the UK. This Report and the information, analysis, opinions and conclusions it contains, are protected by copyright. Erste Group reserves the right to modify the views expressed herein at any time and without notice. Erste Group reserves the right not to update this information or to discontinue it altogether without notice. Any statement herein is non-binding and without any obligation. Erste Group is not responsible for printing or typographical errors. Erste Group 2012.
Published by Erste Bank der oesterreichischen Sparkassen AG Brsegasse 14, A-1010 Vienna, Austria. Tel. +43 (0)5 0100-ext. Erste Bank website: www.erstebank.at On Bloomberg please type: ERBK <GO>.

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