<font size="4">Fitch Affirms Germany's 'AAA' Rating</font>

18 Mar 2002 10:00 AM

Fitch Ratings-London-18 March 2002: Fitch has today affirmed Germany's 'AAA' Long-term foreign currency rating. The Long-term local currency rating is also affirmed at 'AAA' and the Short-term at 'F1+'. The Outlook on the Long-term ratings is Stable. The rating action is supported by a comment examining the current state of German public finances. 'Germany's Public Finances - A Brief Review' will be available free of charge on the agency's web site, www.fitchratings.com. A combination of fiscal slippage through 2001, a near reprimand on the state of its public finances from the European Commission and a sizeable delay to previous deficit and debt reduction targets has seen Germany come under closer scrutiny than usual in recent weeks. As Fitch warned last November, there is a possibility that Germany will breach the 3% of GDP budget deficit ceiling set out in the Stability and Growth Pact (SGP) this year. Although politically embarrassing and damaging for the credibility of the SGP, it would not threaten the sustainability of Germany's public finances and its 'AAA' credit standing. In contrast to large and persistent fiscal deficits, a cyclical deficit in excess of 3% of GDP that would shrink as the economic activity picked up would not be a source of concern from a fiscal solvency perspective.

What is a source of concern, however, is Germany's disappointing record of growth. Economic growth has fallen below 1% during 2001 and 2002, while the average growth rate since 1995 has been about 1.5%, approximately half the average of the rest of the euro area of 2.8%. A prolonged period of weak economic growth would undermine budgetary revenues, hinder proposed tax reductions and prevent any meaningful reduction in general government debt. It is clear, therefore, that in addition to fiscal reform, the German government will need to address structural reform issues more aggressively in a bid to bolster the growth trend of the economy.

Despite the fiscal slippage, the Outlook for the rating remains Stable, underpinned by the stability of Germany's social institutions and strength and diversity of a high value added economy. A prolonged period of low economic growth such as that of 2001 and 2002 would be of concern, as would an indefinite period of fiscal slippage. While Fitch is confident that the German authorities will address the fiscal problems during 2003, a range of structural measures will probably be necessary to bolster the medium-term growth outlook. Reform of the labour market and social security system, particularly pensions, remain important factors for the long-term Outlook.

Fitch's preliminary assessment of the proposal whereby the federal government and the Lander would jointly issue debt is that it would not materially worsen public finances. How the Lander borrow would only impact on Fitch's assessment of the sustainability of Germany's public finances if it were to weaken fiscal discipline over the Lander.

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