“The local government sector in regions such as Bavaria, Baden-Wuerttemberg or Saxony report consistently favourable financial indicators. However, entities located in other regions like Saarland, Rhineland-Palatinate or Nordrhein-Westfalen perform more weakly,” says Harald Sperlein, a VP-Senior Analyst at Moody’s. In Bavaria (Aaa, stable) and Saxony (not rated) the local government sector achieved strong aggregate financial surpluses as percentage of total revenues, while the sector in Saarland (not rated), Rhineland-Palatinate (not rated) and Nordrhein-Westfalen (Aa1, stable) has reported a relatively high financial deficit in 2014.

Aggregate direct debt levels range from under 50% of operating revenues for local governments located in Baden-Wuerttemberg (Aaa, stable), Brandenburg (Aa1, stable) and Bavaria to very high averages of over 140% of operating revenues for local governments located in Rhineland-Palatinate and Saarland. Local and regional governments are economically, financially and administratively interlinked. As a result, municipalities tend to mirror regional financial strength. Municipalities receive ongoing financial support from their Land via an equalisation system (Kommunaler Finanzausgleich) but also some additional transfers for financially weaker entities.

The Laender with the strongest economies are Hessen (not rated), Bavaria and Baden-Wuerttemberg with 113-116% of the national GDP per capita average. At the other end of the spectrum, Mecklenburg-Western Pomerania’s (not rated) economic strength is only 67% of the national average, indicating a weaker tax base.

German Laender benefit from “very high” support assumption, which lifts their final ratings up and results in a narrow range of final ratings (between Aaa and Aa1 for Moody’s rated Laender) at the top of the rating scale, while their baseline credit assessments range from aa1 to a1.

For local governments, however, support assumptions are generally lower and, as a consequence, Moody’s expects a wider spread of ratings at the local government level, compared to the tight clustering of Laender ratings. Moody’s would therefore expect local government ratings to reflect more their idiosyncratic risks and consequently their expected greater variety of baseline credit assessments.