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Fitch Affirms 7 German Laender at 'AAA'; Outlook Stable
May 16, 2014 / 3:45 PM / 3 years ago

Fitch Affirms 7 German Laender at 'AAA'; Outlook Stable

(The following statement was released by the rating agency) FRANKFURT/LONDON/PARIS, May 16 (Fitch) Fitch Ratings has affirmed the seven German federated states (Laender) of Berlin, Hamburg, Lower Saxony, North Rhine Westphalia, Rhineland-Palatinate, Saxony-Anhalt and Schleswig-Holstein at their Long-term foreign and local currency Issuer Default Ratings of 'AAA' with Stable Outlook. The agency has also affirmed their Short-term foreign currency IDRs at 'F1+'. Fitch has also affirmed the currently outstanding bonds issues of the state of Bremen (DE000A11QJV5; DE000A11QJW3 and DE000A11QJU7), the state of Thuringia (DE000A1TM6Z1; DE000A1X3GF6; DE000A1KQ8H0 and DE000A1REW10) and HSH Finanzfonds AoeR (DE000AZ1G09), the latter of which is explicitly and irrevocably guaranteed by the states of Hamburg and Schleswig-Holstein at 'AAA'. Fitch further affirmed the Bund-Laender-Anleihe 1 (DE000A1X2301) and 16 outstanding issues of the German Laender (Laender 27; 29 and 32-45) at 'AAA'. KEY RATING DRIVERS The ratings are driven by the strong institutional framework under which the German Laender operate. The Laender's ratings reflect the stability of the solidarity system that underpins the creditworthiness of all Laender. The solidarity system is enshrined in the German constitution and reflects the institutional framework of the Laender. According to the German constitution, all member states of the federal republic are jointly responsible for supporting a Land in financial distress. If a Land experiences "extreme budgetary hardship", it is entitled to financial assistance from all other Laender. This principle has been reaffirmed by the constitutional courts on more than one occasion in the past, most recently in 2006. Extensive equalisation systems and a broad-based solidarity pact compensate for financial disparity. This equalisation framework requires financially stronger Laender to transfer part of their above-average tax proceeds to the financially weaker ones. The framework partly offsets the differences among Laender's tax revenue base. Fitch also recognises the reforms of the approved Federalism Reform II, which require the Laender to operate their budgets without taking on net new debt starting in 2020. In Fitch's view, these reforms will tighten the budgetary discipline of the Laender as they will generally be unable to increase debt from this date. This change should make extreme budgetary hardship less likely, following the Laender's implementation of appropriate cost-cutting measures to consolidate their budgets to comply with the debt brake. Moreover, the well-established and active liquidity management system that is in place, together with the Laender's excellent access to the capital market and appropriate treasury facilities should prevent any temporary delays in the provision of support. Liquidity risk of a single Land is avoided through bilateral and mutual agreements linking all Laender as well as the federal government, and ensuring their ability to assist one another. Cash would only fail to be forthcoming for any given Land in the event of a complete federal breakdown, in which neither the other Laender nor the federal government itself could provide cash. According to preliminary figures, the German Laender in aggregate have outstanding capital market debt of about EUR544bn, which is large in proportion to their revenues (2013: 185% of current revenue). Servicing costs vary by issuer, but long maturities and low rates of interest have tended to keep costs lower than they might otherwise have been. Fitch considers that the large stock of publicly issued debt (equivalent to around half of German sovereign debt) is a distinctive feature of the Laender, which should reinforce its efforts to comply with the debt brake. According to official forecasts, the Laender's tax revenues are expected to increase 3.3% in 2014, underpinned by expectations that Germany economy will grow by about 1.8%. Combined with lower interest rates, and hence reduced funding costs, and efforts to limit expenditure growth to comply with the debt brake, the Laender budgets are showing an improving trend, although the accumulated net funding deficit of EUR4bn in 1Q14 was EUR1bn higher than in 1Q13. The year-on-year increase was driven by increased costs for personnel resulting from a new wage agreement and higher transfers to municipalities. However, Fitch expects the accumulated net funding deficit to approach zero towards end-2014, based on a deficit of EUR485m in 2013 (preliminary results), Laender's estimated tax growth and expenditure growth similar to the last five years' average. RATING SENSITIVITIES A downgrade of the sovereign ratings could lead to a downgrade of the Laender. An adverse change to any of the important institutional features - solidarity principle, equalisation system, liquidity exchange mechanism - which is currently unlikely in Fitch's view - could also lead to a downgrade of the Laender's ratings. Contact: Primary Analyst Guido Bach Senior Director +49 76 80 76 111 Fitch Deutschland GmbH Taunusanlage 17, D - 60325 Frankfurt am Main Secondary Analysts Nilay Akyildiz Director +49 76 80 76 134 and Dorota Dziedzic Director +48 22 338 62 96 Committee Chairperson Christophe Parisot Managing Director +33 1 44299 134 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: Additional information is available on Applicable criteria, "Tax-Supported Rating Criteria", dated 14 August 2012, "International Local and Regional Governments Rating Criteria outside United States", dated 23 April 2014 on Applicable Criteria and Related Research: Tax-Supported Rating Criteria here International Local and Regional Governments Rating Criteria - Outside the United States here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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