The credit ratings agency Fitch Ratings has downgraded the sovereign debt of Austria – specifically for long term foreign and local currency ratings – from AAA to AA+, with a stable outlook.

Austria's Credit Rating Downgraded

The revised value brings Austria’s credit rating into line with S&P’s evaluation of AA+, although Moodys still lists the central European nation as AAA, despite downgrading its banks.

According to a press release issued by Fitch, the downgrade of Austria’s Issuer Default Ratings (IDRs) reflects several factors, starting with the fact that general government debt will reach a higher peak than previously thought, and will remain elevated for a longer period than expected.

This is expected to reduce Austria’s ability to withstand currency shocks or other financial setbacks, such as declining tax revenues due to reduced trade with Russia.

The debt dynamics of Austria degraded significantly within a short space of time, as less than 18 months ago Fitch had a far more optimistic outlook on the country’s debt ratio.

During that period, bank restructuring – especially major losses associated with the Hypo Alpe Adria – has caused significant impact on government finances, with collective losses by Austrian banks in the period since 2008 estimated to have cost €44 billion (US$60 billion) due to bad loans.

Another factor is Kommunalkredit Austria AG, Austria’s infrastructure bank, which is expected to add a further 2 percent of GDP to the public debt in 2015.

The impact of the lower rating means that Austria’s borrowing costs will increase, leading to a reduction in social spending and government services.