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March 14, 2012
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“Unity in diversity” – is how the debt and financing structure of Germany’s Länder could be neatly summed up, since there are very significant differences between the regions with regard to both the volume and the type and maturity of the debt. Whereas in the past the Länder mainly financed themselves by borrowing from credit institutions, the importance of capital market paper has grown sharply in the meantime. For example, the volume of Länder bonds has risen to more than EUR 300 bn of late. A highly important factor in this connection is the solidarity within the federal state, as the Länder benefit from the good credit rating of the Federation when they procure capital market funding. [more]
Debt structure of the federal states: Capital market debt gaining importance Research Briefing Germany The debt ratio of the Länder (constituent federal states) has risen further in the last few years. Regional differences are considerable, however. This applies to both the scale as well as the type and maturity of debt and thus its structure. Whereas in the past the Länder mainly financed themselves by borrowing from credit institutions, financing via capital market paper has become much more important in the meantime. The volume of bond issuance by the Länder has risen to over EUR 300 bn (quintupling of the nominal value in ten years). Loans currently account for only roughly 50% of the debt. There are considerable differences between the Länder regarding the share of bonds and loans, however. 80% of the funds lent by the credit institutions are long-term. Likewise, the majority of bonds issued are long-dated. However, the share of shorter-dated bonds has risen. The share of capital market paper in respective Länder debt recently ranged between 10% in Saxony and 70% in Hesse. The maturity of loans and debt securities differs considerably between the Länder. In Rhineland-Palatinate, Bremen and North Rhine-Westphalia, the term to maturity was less than one year for 20% of the total debt (as of the end of 2010). In Bavaria, this share was only half the size. The difference is similar when it comes to the floating-rate share of total debt. In Bremen, floating-rate paper recently made up 1/3 of total debt, compared with only roughly 1% in Thuringia. True, the spread between Länder bonds and comparable federal bond issues and between the Länder is not particularly large, but it is appreciable. Despite the joint liability system, different assessments regarding the credit rating and thus the fiscal situation of the individual states certainly are factors besides important aspects such as the liquidity of the market and the general risk appetite. From an economic point of view, this is positive as it increases the incentive to conduct sound fiscal policy and the market thus has a disciplinary effect. Both on the revenue as well as on the expenditure side, the Federation and the Länder are linked by a complex division of powers and responsibilities. Despite their wide-ranging autonomy the Länder have, on the one hand, hardly any means of making quantitatively significant, autonomous decisions about the level of tax revenues. And, on the other, the expenditure that has arisen from the precepts of the Basic Law (for example, in the areas of internal security and education & culture) leads to ongoing spending requirements that cannot be altered at will via autonomous decisions within the Länder. Author Frank Zipfel +49 69 910-31890 frank.zipfel@db.com Editor Barbara Böttcher Deutsche Bank AG DB Research Frankfurt am Main Germany E-mail: marketing.dbr@db.com Fax: +49 69 910-31877 www.dbresearch.com Managing Director Thomas Mayer March 13, 2012 Debt structure of the federal states Capital market debt gaining impo rtance Debt structure of the federal states 2 | March 13, 2012 Research Briefing In addition, the majority of public administration (which also includes fiscal administration) is in the hands of the Länder. However, the Länder have enjoyed (to date) very wide scope at least when it comes to borrowing. All of this has led to a situation where in some Länder a major share of expenditure has been financed by new borrowing. In the past, most debts were taken on in the form of direct loans from credit institutions. The importance of capital market borrowing has increased strongly, however, even though the Länder make use of such instruments to varying degrees, funding themselves for example by issuing bonds (usually in the form of Landesschatzanweisungen and Landesobliga- tionen). What is the structure of the debt, and does it for example display particular patterns? Looking at this issue from the revenue side (and thus from the liquidity side), the cash flow of tax revenues initially lands in the coffers of the Länder as the relevant body responsible for administering taxation. Customs duties and certain consumption taxes, by contrast, are administered and initially received by the customs authority, i.e. the Federation. The Länder then pass on the tax revenues to the Federation and the municipalities in accordance with certain allocation formulae. In terms of (short-term) liquidity, the Länder are therefore in a more comfortable position than the Federation. Drawing direct correlations between this and financing requirements (e.g. short-term loans), is difficult, however. Looking not only at total tax revenue but also total expenditure at the Länder reveals that they follow a regular pattern. Peaks in expenditure tend to occur in the fourth quarter (chart 1), while peaks in income tax come in the second and fourth quarters (chart 5). The volume of tax receipts does, however, fluctuate considerably in some cases The development of (gross) income tax revenue at the Länder level for example is correlated more or less strongly with the economic cycle (GDP; charts 2 and 3), which hardly comes as a surprise. As far as total tax revenues are concerned, the correlation is very mixed, though. The large differences in the correlation between income tax and GDP as well as between total tax revenues and GDP in individual Länder are hard to explain at this juncture and cannot be solely due to the sales tax. As these are gross tax revenues, the tax distribution (including the Länder financial equalisation system) cannot actually be a factor either. The development in tax receipts, however, allows few conclusions to be drawn about the indebtedness of the Länder (and municipalities). Correlation between GDP and tax revenue 2 Income tax relative to Land GDP* All taxes relative to Land GDP* BW 0.7302 0.6276 BY 0.5642 0.4159 BE 0.8040 0.2160 BB 0.4972 0.3346 HB 0.3917 0.4996 HH 0.3225 0.0029 HE 0.6208 0.4235 MV 0.5495 0.1059 NI 0.6221 0.7804 NW 0.7083 0.3321 RP 0.5366 0.5548 SL 0.2809 0.0634 SN 0.2566 0.4353 ST 0.5352 0.4809 SH 0.4422 0.6732 TH 0.2960 0.4341 *Correlation coefficients of the rates of change, 2000 - 2010, gross tax receipts (prior to distribution) Sources: DB Research, Federal Statistical Office 30 40 50 60 70 80 90 04 05 06 07 08 09 10 11 Tax revenue Expenditure Expenditure and tax revenue peak in Q4 1 Quarterly expenditure and tax revenue (EUR bn), Länder tax revenue Sources: DB Research, Bundesbank -25 -15 -5 5 15 25 35 00 01 02 03 04 05 06 07 08 09 10 German nominal GDP* BW BY HE NW Income tax receipts fluctuate considerably 3 Change (%) vs pre - year quarter, gross income tax receipts in respective Land Sources: DB Research, Federal Statistical Office Debt structure of the federal states 3 | March 13, 2012 Research Briefing A Länder comparison reveals that there are very large differences between the debt levels of the individual states (chart 4, with municipalities for comparability of territorial states and city-states). 1 This also applies to the structure of the debt. In general the Länder avail themselves of two types of debt: loans and bonds. In the past loans were by far the predominant instrument, more recently increasing amounts of bonds have been issued (mostly in the form of Landes- schatzanweisungen and Landesobligationen). Importance of borrowing receding Until the turn of the millennium the volume of borrowing by the Länder grew constantly, and since then it has been falling slightly. The share of loans in total debt has, however, fallen to 50% (charts 6 and 9). Furthermore, it can be seen that the volume and the share of direct loans from credit institutions are also declining sharply. The bank loans granted are predominantly of longer maturity (i.e. more than 5 years; charts 7 and 8) and the volume is also declining. Mortgage banks have lost their dominant role compared to Landesbanks, banks with special functions and commercial banks (charts 20-24, appendix). 1 For a detailed discussion, see Zipfel (2011). Finances of German Länder, Current Issues. Deutsche Bank Research. Frankfurt am Main. 0 5 10 15 20 25 30 SN BY BW MV TH NI HE BB D RP ST SH NW HH SL BE HB Per - capita debt of Länder and their municipalities (EUR '000), 2010 Per - capita debt - large variations 4 Sources: Federal Statistical Office, DB Research 0 2 4 6 8 10 12 14 16 06 07 08 09 10 BW BY HE NW *Over 2/3 of gross income tax receipts in Germany are collected in these four Länder Income tax revenues concentrated in Q2 and Q4 5 Quarterly gross income tax receipts of Federation/Land/municipalities in respective Land * (prior to distribution), EUR bn Sources: DB Research, Federal Statistical Office 0 50 100 150 200 250 300 93 95 97 99 01 03 05 07 09 11 Landesobligationen/Landes - schatzanweisungen Direct loans from credit institutions Other loans (non - banks) Sources: Bundesbank, DB Research Fewer loans from banks 6 Länder debt by type (EUR bn) 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 95 97 99 01 03 05 07 09 11 Short Medium Long Bank loans to Länder – long term! 7 Direct loans from credit institutions, percentage according to maturity Sources: DB Research, Bundesbank 0 50 100 150 200 250 81 84 87 90 93 96 99 02 05 08 11 Short Medium Long Volume of long - term bank loans falling 8 Direct loans from credit institutions, volume according to maturity (EUR bn) Sources: DB Research, Bundesbank Debt structure of the federal states 4 | March 13, 2012 Research Briefing Bonds gaining importance The growing debt of the Länder has increasingly been financed using capital market paper – such as bonds. 2 The Länder as a whole have only made extensive use of bonds since the turn of the millennium (charts 9 and 10). During the 1990s the nominal value of bonds outstanding averaged some EUR 50 bn (the value tripled between 1990 and 2000). Since then the volume has more than quintupled (to more than EUR 300 bn). This is also reflected in the Länder share of the total volume of public-sector bonds, which has doubled from nearly 10% to 20%. A look at issuance activity (chart 12) shows that the Länder attempt to place as many bonds as possible right at the start of the year. This is probably due to the fact that the budget law allows a certain amount of borrowing which is then fixed for the whole of the year. The individual Länder, however, avail themselves of bonds to very differing degrees (chart 11). In 2010 Hesse was the Land that made the most active use of capital market paper, which constituted nearly 70% of debt at year-end. Some way behind came Berlin, North Rhine-Westphalia and Rhineland-Palatinate with nearly 60%. At the other end of the scale there was Saxony whose debt was financed via loans to the tune of nearly 90% as of the end of 2010. Since 1999 the volume of shorter-dated bonds (i.e. with maturities of less than 4 years) has risen across all the Länder (chart 13). Indeed the share of these bonds climbed to nearly 30%. 2010 saw the issuance of primarily shorter-dated bonds. For all the Länder combined 75% of their bonds had maturities of up to 5 years (chart 14). Though, comparing the Länder with each other also reveals major differences (see charts 25-29 in the appendix for detailed information). The yields on Länder bonds not only differ between the individual states – albeit to a relatively small degree – but also feature premia to federal bonds. With the increase in bond issuance since 2000 the yield spread to federal bonds narrowed and only started to widen again when the financial market crisis 2 The data used in this report is sourced from the Federal Statistical Office, the Bundesbank and Bloomberg. Particularly with bonds there are in some cases considerable differences between these data sources. These are presumably due at least in part to the distinction drawn between debt securities and loans. The Federal Statistical Office published completely revised debt level statistics (Fachserie 14 Reihe 5) at the end of September (and a corrected version at the end of November). Both the data collection method and scope were converted and also expanded. This annual publication therefore provides the most comprehensive presentation of the debt situation of Germany’s different levels of government. 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 97 99 01 03 05 07 09 11 Direct lending from credit institutions Bonds Loans from non - banks Loan share down to 50% 9 Respective share of total debt Sources: Bundesbank, DB Research 0 50 100 150 200 250 300 350 95 97 99 01 03 05 07 09 11 All maturities Maturity of more than 4 years Maturity of up to 4 years Bonds increasingly popular 10 Sources: Bundesbank, DB Research Nominal value of Länder bonds outstanding (EUR bn) 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% SN TH SL BY HH MV SH ST NI BW D BB HB RP NW BE HE Cash advances Securities Loans Länder use of bonds and loans varies very widely 11 Respective share of total debt constituted by debt securities (Landesschatzanweisungen), loans and cash advances in the non - public sector (%), 2010 Sources: DB Research, Federal Statistical Office 0 5 10 15 20 25 30 35 05 06 07 08 09 10 11 All maturities Maturity of over 4 years Maturity of up to 4 years Bonds mostly issued in Q1 12 Gross volume of Länder bond sales (EUR bn) Sources: Bundesbank, DB Research Debt structure of the federal states 5 | March 13, 2012 Research Briefing began. 3 According to a Bundesbank assessment made in 2008 the main reasons for this were not only that Länder bonds were less liquid but also that market participants were generally risk averse. The former is illustrated by the mostly slender premia for joint Länder bonds (“Jumbos”). By contrast, growing risk aversion results in generally higher yields for holding Länder bonds. Nevertheless, another factor – despite the mutual assistance obligation – is the credit rating, i.e. the assessment of the fiscal situation and of the debt level among other things. Unfortunately, detailed (i.e. for each individual Land), more recent analyses of the Bundesbank data set for all Länder bonds are not available. Serving as a kind of proxy in a comparative example below we therefore present individual, selected traded bonds of various Länder with virtually the same maturity and the same volume (with a term to maturity of 5 years to Q1 2011 and a volume of around EUR 1 bn; charts 15, 16 and 17). What we find are definitely appreciable differences between the Länder and between the Länder and the Federation (average yield on 5-year federal bonds). The spreads between federal and Länder bonds in the case of Berlin and North Rhine-Westphalia in the example shown amount to more than 100 basis points. The premium for Bavaria and Hesse is nearly 40 basis points lower. The overall increase in the premium of Länder bonds to federal bonds in Q2 and Q3 2011, however, clearly shows the currently strong demand for safe federal bonds. Furthermore, the Länder have for some time been issuing bonds not only in euro, but also for example in Swiss francs or Japanese yen. The share of such bonds is low, though – the average for all Länder was just under 3% at last count (2010). Many Länder make hardly any use of them. At the end of 2010 the largest portfolios of non-euro-denominated bonds were held by Brandenburg with 7% and North Rhine-Westphalia with 6%. In Hesse (more than 3%) and Berlin (more than 2%) the levels are only half as much, while in the other Länder non-euro-denominated bonds are virtually nonexistent. 3 See Bundesbank (2008). The market for federal state bonds. In Bundesbank Monthly Report. June 2008. 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 96 98 00 02 04 06 08 10 Maturity of more than 4 years Maturity of up to 4 years Länder bonds are shorter dated 13 Respective maturity class as a percentage of all bonds outstanding (nominal value) Sources: Bundesbank, DB Research 2.9 50.1 18.3 Up to 1 year 1 to 5 years More than 5 years Maturities of Länder bonds issued in 2010 14 Issuance of money and capital market paper of all Länder (EUR bn), 2010 Sources: DB Research, Federal Statistical Office 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0 1.1 Jan 11 Apr 11 Jul 11 Oct 11 Jan 12 N. Rhine - Westph. Bavaria Hesse Lower Saxony Berlin Spreads of traded Länder bonds over traded federal bonds 16 Yield on selected bond with approximately the same term to maturity and volume (5 years remaining to Q1 2011), % Sources: DB Research, Bloomberg (as at January 2012) 0.7 0.9 1.1 1.3 1.5 1.7 1.9 2.1 2.3 2.5 2.7 2.9 3.1 3.3 Jan 11 Apr 11 Jul 11 Oct 11 Jan 12 N. Rhine - Westph. Bavaria Hesse Lower Saxony Germany (average) Berlin Yield comparison for traded federal and Länder bonds 15 Yield on selected bonds with approximately the same term to maturity and volume (5 years remaining to Q1 2011), % Sources: DB Research, Bloomberg (as at January 2012) Debt structure of the federal states 6 | March 13, 2012 Research Briefing There certainly are major differences between the financing of the Länder with regard to maturities and type of debt. This applies to both bonds and loans. As of December 31, 2010, not only in Bavaria and Baden-Württemberg, but also in Saarland around 60% of debt (loans and bonds) was not due for redemption until after 2015 (chart 18). The debts of Brandenburg, North Rhine-Westphalia, Saxony and Hamburg, by contrast, are very much shorter-dated. In these Länder 60% of debt will mature before 2015. The portfolios of loans and securities were particularly short-dated in Rhineland-Palatinate, Bremen and North Rhine-Westphalia, where 20% of the debt was financed with instruments due for redemption in up to one year. Some of the Länder whose portfolios of loans and bonds are more short term in nature also have a high proportion of floating-rate paper (chart 19). In the case of Bremen the figure is nearly 1/3 of total debt, but in Brandenburg, Saxony- Anhalt and Rhineland-Palatinate, too, the floating-rate share of total debt is much higher than in the other Länder at around 20%. Conclusion Unity in diversity is how one could neatly sum up the structure of Länder debt and financing. There is, however, a clear trend towards more financing via capital market bonds. Of major significance here is the feature of solidarity in the federal state, i.e. joint liability of the Federation and the Länder. The Länder benefit from this – above all from the good credit rating of the Federation – when they tap the capital market for funding. However, the view that is becoming increasingly established is that the fiscal situations of the individual Länder cannot be treated completely the same after all and that assistance from the federal level (especially after the financial equalisation arrangement expires in 2020) probably cannot be expected to the same extent as has been the case up until now. The introduction of the debt brake by 2020 is to be regarded as a positive step in economic terms. This is the only way to maintain the incentive to conduct a sustainable and sound fiscal policy at the Länder level. The recent demand for joint (and severally liable) bonds issued by the Federation and the Länder should therefore be regarded with concern. Individual efforts must pay off – they are rewarded by investors in the capital markets. Frank Zipfel (+49 69 910-31890, frank.zipfel@db.com) Capital market debt (traded bonds) 1 7 Total bonds issued Average coupon Average term to maturity EUR bn % Years BW 17.4 3.9 4.7 BY 10.2 3.4 3.8 BE 37.8 3.4 3.3 BB 10.5 3.6 3.2 HB 7.6 0 1.6 HH 5.4 2.6 2.3 HE 27.4 3.2 4.2 MV 0.8 4.5 5.7 NI 31.8 3.4 3.5 NW 78.3 3.1 3.8 RP 19.8 3 3.3 SL 1.9 2 3 SN 0.9 3.9 3.6 ST 10.2 4.1 4 SH 8.5 3.2 3 TH 2.4 3.5 3 Source: Bloomberg (as at January 2012) 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% HH SN NW BB HE RP HB MV BE D NI SH TH ST BY BW SL in 2011 in 2012 in 2013 in 2014 in 2015 after 2015 Maturities of Länder debt 18 Share of total debt (securities and loans, excluding cash advances), as at end - 2010 Sources: DB Research, Federal Statistical Office 0% 5% 10% 15% 20% 25% 30% 35% HB BB BE ST RP NI SH HH D HE NW BW SN SL MV BY TH *Securities and loans (excluding cash advances) Very wide variations in floating - rate share 19 Floating - rate share of total debt for each Land *, 2010 Sources: DB Research, Federal Statistical Office Debt structure of the federal states 7 | March 13, 2012 Research Briefing 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 00 01 02 03 04 05 06 07 08 09 10 Commercial banks Landesbanks Savings banks Cooperative central banks Credit unions Mortgage banks Special - purpose banks Building and loan associations (Book) loans to Länder of all maturities 20 Respective banking group share of total disbursement (%), annual figures Sources: DB Research, Bundesbank 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 00 01 02 03 04 05 06 07 08 09 10 Commercial banks Landesbanks Savings banks Cooperative central banks Credit unions Mortgage banks Special - purpose banks Building and loan associations (Book) loans to Länder with a maturity of up to 1 year 21 Sources: DB Research, Bundesbank Respective banking group share of total disbursement (%), annual figures 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 00 01 02 03 04 05 06 07 08 09 10 Commercial banks Landesbanks Savings banks Cooperative central banks Credit unions Mortgage banks Special - purpose banks Building and loan associations (Book) loans to Länder with a maturity of over 1 year and up to 5 years 22 Respective banking group share of total disbursement (%), annual figures Sources: DB Research, Bundesbank 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 00 01 02 03 04 05 06 07 08 09 10 Commercial banks Landesbanks Savings banks Cooperative central banks Credit unions Mortgage banks Special - purpose banks Building and loan associations (Book) loans to Länder with a maturity of over 5 years 23 Sources: DB Research, Bundesbank Respective banking group share of total disbursement (%), annual figures Debt structure of the federal states 8 | March 13, 2012 Research Briefing 0 1 2 3 4 5 6 7 8 9 10 99 01 03 05 07 09 Up to 1 year Over 1 year and up to 5 years Over 5 years (Book) loans by big banks to Länder by maturity 24 EUR bn, annual figures Sources: Bundesbank, DB Research - 1 2 3 4 5 BW BY BB HE MV NI NW RP SL SN ST SH TH BE HB HH Securities Loans Borrowing with a maturity of up to 1 year in 2010 25 Debt securities and loans in the non - public sector (EUR bn) Sources: Federal Statistical Office, DB Research - 5 10 15 20 BW BY BB HE MV NI NW RP SL SN ST SH TH BE HB HH Securities Loans Borrowing with a maturity of over 1 year and up to 5 years in 2010 26 Debt securities and loans in the non - public sector (EUR bn) Sources: Federal Statistical Office, DB Research - 2 4 6 8 10 BW BY BB HE MV NI NW RP SL SN ST SH TH BE HB HH Securities Loans Sources: Federal Statistical Office, DB Research Borrowing with a maturity of more than 5 years in 2010 27 Debt securities and loans in the non - public sector (EUR bn) Debt structure of the federal states 9 | March 13, 2012 Research Briefing Traded Länder bonds by maturity 30 EUR m 2012 2013 2014 2015 2016 2017 2018 2019 2020 >2020 BW 2,350 845 2,000 3,325 2,881 1,000 2,100 1,250 150 1,494 BY 1,600 1,542 1,085 1,075 1,110 1,250 975 50 1,250 228 BE 5,707 6,605 6,616 6,440 4,937 3,675 919 250 0 2,636 BB 2,023 2,808 1,337 1,120 1,505 100 247 60 160 1,165 HB 2,000 2,750 1,900 900 0 0 0 0 0 0 HH 1,375 1,080 952 1,575 50 50 161 130 0 0 HE 2,100 4,076 4,700 4,765 3,899 2,089 650 0 2,150 2,971 MV 0 250 150 0 0 100 0 0 0 256 NI 4,550 4,550 4,800 5,225 5,035 2,500 2,835 1,175 0 1,150 NW 12,529 13,480 14,106 13,381 9,231 2,925 3,667 1,950 510 6,535 RP 4,660 4,500 2,686 942 1,338 1,800 1,497 835 0 1,502 SL 185 361 350 500 215 285 20 0 0 0 SN 150 50 307 100 20 95 100 10 0 100 ST 1,131 1,582 1,472 1,642 1,395 1,531 105 0 70 1,250 SH 1,225 1,282 1,783 1,650 1,435 800 121 213 0 0 TH 500 200 500 500 0 600 0 0 50 0 Source: Bloomberg (as of January 17, 2012) 0% 20% 40% 60% 80% 100% HB ST HH BE NW BB D BW HE NI SN RP SH MV SL BY TH Up to 1 year 1 to 5 years Over 5 years Debt securities in 2010 28 Money and capital market paper, share of maturity class per Land (%) Sources: DB Research, Federal Statistical Office 0% 20% 40% 60% 80% 100% HB BW SL HH SN BY D BE BB HE MV TH NW SH RP ST NI Up to 1 year Over 1 year and up to 5 years Over 5 years Loans in 2010 29 Loans in the non - public sector, share of maturity class per Land (%) Sources: DB Research, Federal Statistical Office Germany at a glance The online resource (on the internet exclusively for clients) Germany at a glance provides access to economic data at district/ county and state level: some of the main topics include public finances, economic strength, labour market, consumption, business structures, demographics and education. 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