Moody's: German debt issuers' credit profiles resilient to potential election outcomes

While the outcome of Germany's federal elections will shape fiscal and economic policy that will influence credit conditions over the next four years, the results are unlikely to have any material credit impact on the country's rated debt issuers, Moody's Investors Service said in a report today.

The report, "Cross-Sector -- Germany: Credit profiles resilient to election outcome, regardless of new coalition composition", is available on www.moodys.com. Moody's subscribers can access the report using the link at the end of this press release. The research is an update to the markets and does not constitute a rating action.

"Although the German elections could result in a number of different potential coalitions, we don't expect any plausible combination to have a material impact on the credit profiles of the country's rated debt issuers," said Colin Ellis, a Moody's Managing Director and co-author of the report.

Germany's sovereign credit quality is resilient to any plausible election outcome given the country's very high economic, institutional and fiscal strength.

However, growth and debt levels will be influenced by policymakers' response to rising demographic pressures and their approach to labour market flexibility. At the European level, the government's stance on issues such as debt pooling or fiscal transfers among European Union countries will be an important factor.

Given the main parties' differing views on these and other important policy areas, the composition of the next coalition will, at the margins at least, influence how Germany's sovereign credit profile evolves.

The election outcome will have a limited impact on German regional and local governments, whose budgets are not expected to come under pressure following the election. The recently agreed equalisation system for beyond 2020, as well as the debt brake mechanism, are elements that support Moody's view of a predictable and stable operating environment.

The credit quality of most Germany-domiciled rated non-financial corporates will also be resilient to the election result due to their size and geographical diversification. Domestic sources typically make up a low share of German companies' group revenues, meaning that any changes to corporation tax rates, economic growth expectations or the consumer environment would only lead to minor changes in profitability and credit quality.

While the major parties will continue to support Germany's energy transition goals and climate change targets, a more left-leaning coalition would likely accelerate the exit from coal-fired generation and the switch to emission-free transport, housing and heating. This would put extra pressure on thermal generators with exposure to coal-fired generation.

On the infrastructure side, all the main parties favour the improvement and expansion of roads and railways. There may be significant investment opportunities, with potential for additional public-private partnerships, particularly for road expansion projects, if these are considered cost effective.

For German financial institutions, a post-election deterioration in credit quality appears unlikely. Any change arising from the election on the banking sector would be confined to Germany's macroeconomic performance. The influence of the election on economic growth would be most relevant because of the German banking system's domestic focus.

In structured finance, the elections are unlikely to result in any impact on the credit quality of domestic securitisation transactions or covered bonds.