Fitch affirms Germany at 'AAA'; Outlook stable

Fitch has simultaneously affirmed Germany's Country Ceiling at 'AAA' and Short-term foreign currency IDR at 'F1+'.

"Germany's economic outlook has been enhanced, not only by its recent robust macroeconomic performance - mostly due to a strong recovery of exports and a pickup in investments - but also by its resilient labour market, with unemployment reaching a low not seen since 1991," says Maria Malas-Mroueh, Associate Director in Fitch's Sovereign team.

"On a more fundamental level, Germany continues to command one of the world's strongest net international investment positions (at 38% of GDP in 2009), affording it safe-haven investment status, as reflected in its benchmark spreads that have tightened significantly during the euro area crisis," adds Ms. Malas-Mroueh.

Following a sharp GDP contraction of 4.7% in 2009, the recovery has taken a clear 'V' shape, with Q210 growth reaching 2.2% qoq, prompting Fitch to revise up its forecast for 2010 GDP to 3.6% (from 1.6%). Fitch expects more gradual growth in the medium term (at around 2% for 2011 and 2012), as the pace of the recovery, particularly of global trade, moderates.

As the primary benchmark issuer for the euro area, Germany enjoys significant financing flexibility, allowing it to extend generous fiscal stimulus measures to support its economy and financial sector during the downturn. Although this flexibility has provided a cushion from the negative impact of the recession, the government outlays contributed to public finance deterioration, with Germany's balanced budget position in 2008 leading to a 3.3% of GDP deficit by 2009. Fitch expects the 2010 deficit and public debt to further escalate to 4.3% of GDP and 76% of GDP, respectively.

Germany has expressed its commitment to reversing its fiscal imbalances through the government's four-year consolidation programme, aimed at reducing the budget deficit to below 3% by 2013. This would imply a tightening of less than 1.5% of GDP from 2010-13, compared with around 5% of GDP for France and the UK. Moreover, the constitutional balanced-budget rule, adopted in August 2009, provides for an institutional guarantee of budgetary constraint and enhances fiscal credibility. Fitch considers the risks to the government consolidation programme to be skewed to the upside, largely on account of Germany's fiscal discipline as well as the strong cyclical rebound in 2010. Even so, debt is unlikely to stabilise before 2013.

Restructuring and consolidation of Germany's banking sector remains one of the country's major challenges due to structural overcapacity of the Landesbankens and significant exposures to lower-rated foreign assets. Pressures on the financial system have eased with the improving economic outlook and ample government support measures extended. Also, EU-wide stress tests - in which 14 German banks participated (representing over 60% of banking system assets) - have somewhat alleviated concerns surrounding the system's vulnerability. Nonetheless, Fitch notes that the financial sector will remain a source of potential contingent liabilities for the government, as will Germany's participation in European sovereign financial stabilisation mechanisms, both of which could put upward pressure on Germany's public debt ratios.

Germany's 'AAA' rating is further underpinned by its strengths as a large and diversified high-value-added economy with high GDP per capita, prudent macroeconomic management, and effective political, civil, and social institutions.