Research Update:

Germany 'AAA/A-1+' Ratings Affirmed On Steady Growth Prospects; Outlook Stable

Primary Credit Analyst: Elliot Hentov, PhD, London (44) 207-176-7071; elliot.hentov@standardandpoors.com Secondary Contact: Moritz Kraemer, Frankfurt (49) 69-33-999-249; moritz.kraemer@standardandpoors.com Analytical Group Contact: SovereignEurope; SovereignEurope@standardandpoors.com

Table Of Contents
Overview Rating Action Rationale Outlook Key Statistics Related Criteria And Research Ratings List

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Research Update:

Germany 'AAA/A-1+' Ratings Affirmed On Steady Growth Prospects; Outlook Stable

Overview
In our view, Germany has a highly diversified and competitive economy with a demonstrated ability to absorb large economic and financial shocks. We are affirming our unsolicited 'AAA' long-term and 'A-1+' short-term ratings on Germany. The outlook on the long-term rating is stable, reflecting our view that Germany's public finances and strong external balance sheet will continue to withstand potential financial and economic shocks.

Rating Action
On Jan. 10, 2014, Standard & Poor's Ratings Services affirmed its unsolicited 'AAA/A-1+' long- and short-term foreign and local currency sovereign credit ratings on the Federal Republic of Germany. The outlook is stable.

Rationale
The ratings on Germany reflect our view of its modern, highly diversified, and competitive economy, and the government's track record of prudent fiscal policies and expenditure discipline. Furthermore, we believe the German economy has demonstrated its ability to absorb large economic and financial shocks. After slowing to an estimated 0.5% real GDP growth in 2013, we forecast the German economy will expand steadily over the medium term, averaging above 1.5% real GDP per capita growth in 2014-2016. Germany's economic model continues to be driven by high net exports as well as relative competitiveness achieved from years of corporate restructuring, wage restraints, and high savings rates. These factors have also enabled the country to generate sizable trade and current account surpluses, which have led to a solid net external creditor position (including nondebt assets and liabilities). In addition, we do not consider Germany's private- or public-sector balance sheets to be under any material strain. Unlike most other highly rated peers, Germany has avoided the need for significant private-sector deleveraging and fiscal consolidation. Nevertheless, we expect consumption to expand only modestly despite the introduction of the minimum wage and recent increases in consumer confidence. The government will also maintain tight fiscal policies to comply with its constitutional fiscal rule. In addition, some of Germany's major trading partners are still reducing debt, which we believe will weaken external demand

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Research Update: Germany 'AAA/A-1+' Ratings Affirmed On Steady Growth Prospects; Outlook Stable

for German goods and services. As a result, we forecast the current account surplus to gradually shrink to 4.4% of GDP by 2016, from 7.0% in 2012. Germany is primed for a period of balanced general government budgets. We believe balances will stay closely aligned to the new constitutional target of limiting structural federal government net lending to below 0.35% of GDP. In detail, we forecast deficits to average 0.17% of GDP in 2014-2016, a performance facilitated by the favorable growth environment. We note that similar statutory fiscal constraints have had a poor track record in several other countries, but we believe that this institutional framework may be more effective in Germany because of long-standing public and political support for fiscal discipline. As evidence, the Social Democrats' return to government does not appear to challenge the medium-term fiscal plan. The constitutional limit should also, in our view, mitigate the consequences of Germany's federal system not typically lending itself to swift and efficient policymaking. As a result of small deficits, we expect Germany's net general government burden to gradually decline to closer to 71% of GDP in 2016 from its current 77%. Under our methodology, this figure does not include liabilities arising from the various multilateral financial support mechanisms in the eurozone, which we consider to be contingent liabilities. Germany's European Financial Stability Facility (EFSF) and European Stability Mechanism (ESM) liabilities could amount to as much as 235 billion or about 9% of GDP. However, this figure assumes the worst-case scenario--that the ESM would lend the maximum amount, that all borrowers would default, and that there would be no recovery at all. Since this is a remote prospect, we currently do not consider this an immediate risk to the rating. Meanwhile, we believe Germany can carry a somewhat higher debt burden than many peers given its diverse and resilient economic structure as well as its access to low-cost capital market funding. A deepening and prolonged eurozone crisis could hit Germany's economy in other ways. Direct exports to Italy, Spain, Portugal, and Greece were less than 4% of German GDP in 2013, according to official data. However, the exposure of Germany's financial institutions to strained eurozone economies remains significant. According to Bank for International Settlements data, German commercial bank claims at the end of June 2013 on the aforementioned countries, plus Cyprus, still totaled US$298 billion, or about 8.3% of GDP. This amount refers to total country claims, not only sovereign exposure. It is basically unchanged from a year earlier, when the eurozone debt crisis was at its peak, although these claims have decreased by more than half since the mid-2008 peak (in dollar terms). As a consequence, the substantial financial support made available to the eurozone periphery could significantly reduce the likelihood that Germany would need to provide further support to domestic banks, and the likelihood of an exogenous shock to Germany's economy. From a monetary perspective, we consider Germany's eurozone membership to

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Research Update: Germany 'AAA/A-1+' Ratings Affirmed On Steady Growth Prospects; Outlook Stable

reduce its monetary flexibility, but we acknowledge that Germany has benefited from the euro's status as a reserve currency, as well as from the credibility of European Central Bank monetary policy. Germany's eurozone membership has also largely shielded the German tradables sector from currency appreciation pressure, supporting an increase in the export share to 52% of GDP in 2013, from an average of 26% of GDP in the five-year period preceding the introduction of the common currency.

Outlook
The stable outlook reflects our expectation that Germany's public finances will continue to withstand potential financial and economic shocks and that consensus in favor of prudent economic policies will remain. We expect these factors to contain the net general government debt ratio and sustain the economy's net external creditor position. The stable outlook is also predicated on our expectation of an orderly resolution of the simmering debt crisis in parts of the eurozone. We could lower the ratings on Germany if, contrary to our current expectations, the net general government debt ratio increases significantly from its current level of just under 80% of GDP. This could occur, for example, if consistently larger-than-anticipated deficits significantly exceed the constitutional limit. An unexpected surge in contingent liabilities, particularly from the banking sector, or other contagion effects from a revived eurozone crisis, could also create downward pressure on the ratings. We currently do not expect these scenarios to materialize over the outlook horizon (up to 24 months).

Key Statistics
Table 1

Federal Republic of Germany - Selected Indicators

2006 Nominal GDP (US$ bil) GDP per capita (US$) Real GDP growth (%) Real GDP per capita growth (%) Change in general government debt/GDP (%) General government balance/GDP (%) General government debt/GDP (%) Net general government debt/GDP (%) General government interest expenditure/revenues (%) 2,903 35,211 3.7 3.8 2.2 (1.7) 68.1 64.7 6.5 2007 3,324 40,379 3.3 3.5 0.4 0.2 65.3 62.2 6.4 2008 3,624 44,073 1.1 1.2 2.8 (0.1) 66.9 64.3 6.3 2009 3,312 40,383 (5.1) (4.9) 4.9 (3.1) 74.7 72.1 5.9 2010 3,308 40,434 4.0 4.3 11.4 (4.2) 82.5 79.8 5.8 2011 3,633 44,438 3.3 3.4 1.1 (0.8) 80.0 77.4 5.7 2012 3,426 41,857 0.7 0.6 2.8 0.1 81.0 78.5 5.3 2013e 3,612 44,119 0.5 0.5 0.1 (0.1) 79.5 77.1 5.6 2014f 3,758 45,849 1.8 1.7 0.0 0.0 77.0 74.6 5.4 2015f 3,768 45,906 1.7 1.6 0.2 (0.2) 74.8 72.5 5.5 2016f 3,865 47,023 1.4 1.2 0.3 (0.3) 73.3 71.0 5.4

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Research Update: Germany 'AAA/A-1+' Ratings Affirmed On Steady Growth Prospects; Outlook Stable

Table 1

Federal Republic of Germany - Selected Indicators (cont.)

Oth dc claims on resident non-govt. sector/GDP (%) CPI growth (%) Gross external financing needs/CARs +use. res (%) Current account balance/GDP (%) Current account balance/CARs (%) Narrow net external debt/CARs (%) Net external liabilities/CARs (%) 119.5 1.8 182.6 6.3 11.4 52.8 (55.2) 117.4 2.3 181.1 7.4 12.9 43.2 (50.8) 122.7 2.8 196.2 6.2 10.9 47.2 (43.8) 127.0 0.2 213.6 6.0 11.7 57.4 (70.3) 118.6 1.1 192.9 6.3 11.1 69.8 (65.5) 114.4 2.5 179.4 6.2 10.5 63.8 (55.1) 111.4 2.2 177.7 7.0 11.6 69.4 (72.3) 110.3 1.6 179.9 6.4 10.6 65.4 (78.3) 109.0 1.5 182.3 5.5 9.0 62.2 (83.6) 107.7 1.7 182.5 5.1 8.2 63.9 (90.2) 107.1 1.9 181.2 4.4 7.0 61.1 (93.4)

Other depository corporations (dc) are financial corporations (other than the central bank) whose liabilities are included in the national definition of broad money. Gross external financing needs are defined as current account payments plus short-term external debt at the end of the prior year plus nonresident deposits at the end of the prior year plus long-term external debt maturing within the year. Narrow net external debt is defined as the stock of foreign and local currency public- and private- sector borrowings from nonresidents minus official reserves minus public-sector liquid assets held by nonresidents minus financial sector loans to, deposits with, or investments in nonresident entities. A negative number indicates net external lending. CARs--Current account receipts. e--Estimate. f--Forecast. The data and ratios above result from S&Ps own calculations, drawing on national as well as international sources, reflecting S&Ps independent view on the timeliness, coverage, accuracy, credibility, and usability of available information.

Related Criteria And Research

Related Criteria
Sovereign Government Rating Methodology And Assumptions, June 24, 2013 Methodology For Linking Short-Term And Long-Term Ratings For Corporate, Insurance, And Sovereign Issuers, May 7, 2013 Methodology: Criteria For Determining Transfer And Convertibility Assessments, May 18, 2009

Related Research
The Eurozone's Long, Unwinding Road, Dec. 3, 2013 The Eurozone Crisis Isn't Over Yet, Oct. 1, 2013 Banking Industry Country Risk Assessment: Germany, Sept. 26, 2013 Is Austerity Being Relaxed in the Eurozone And Does it Matter for Ratings? June 4, 2013 Sovereign Defaults And Rating Transition Data, 2012 Update, March 29, 2013 S&P Clarifies Its Approach To Accounting For EFSF Liabilities When Rating The Sovereign Guarantors, Nov. 2, 2011

In accordance with our relevant policies and procedures, the Rating Committee was composed of analysts that are qualified to vote in the committee, with sufficient experience to convey the appropriate level of knowledge and understanding of the methodology applicable (see 'Related Criteria And Research'). At the onset of the committee, the chair confirmed that the information provided to the Rating Committee by the primary analyst had been

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Research Update: Germany 'AAA/A-1+' Ratings Affirmed On Steady Growth Prospects; Outlook Stable

distributed in a timely manner and was sufficient for Committee members to make an informed decision. After the primary analyst gave opening remarks and explained the recommendation, the Committee discussed key rating factors and critical issues in accordance with the relevant criteria. Qualitative and quantitative risk factors were considered and discussed, looking at track-record and forecasts. The chair ensured every voting member was given the opportunity to articulate his/her opinion. The chair or designee reviewed the draft report to ensure consistency with the Committee decision. The views and the decision of the rating committee are summarized in the above rationale and outlook.

Ratings List
Ratings Affirmed Germany (Federal Republic of) (Unsolicited Ratings) Sovereign Credit Rating AAA/Stable/A-1+ Transfer & Convertibility Assessment AAA IKB Deutsche Industriebank AG Senior Unsecured*

AAA

*Guaranteed by the Federal Republic of Germany.

This unsolicited rating(s) was initiated by Standard & Poor's. It may be based solely on publicly available information and may or may not involve the participation of the issuer. Standard & Poor's has used information from sources believed to be reliable based on standards established in our Credit Ratings Information and Data Policy but does not guarantee the accuracy, adequacy, or completeness of any information used. Complete ratings information is available to subscribers of RatingsDirect at www.globalcreditportal.com and at spcapitaliq.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column. Alternatively, call one of the following Standard & Poor's numbers: Client Support Europe (44) 20-7176-7176; London Press Office (44) 20-7176-3605; Paris (33) 1-4420-6708; Frankfurt (49) 69-33-999-225; Stockholm (46) 8-440-5914; or Moscow 7 (495) 783-4009.

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