The German government last week adopted a draft law to support financially weak municipalities via an earmarked infrastructure and climate protection fund and Moody’s said yesterday (Monday) that this shows the central government’s support for local governments and is hence credit positive for public sector Pfandbriefe.

According to Moody’s, the German government adopted the draft law last Wednesday. Under the law, participating municipalities need to contribute 10% of a project’s cost from their own capital and the central government will provide the remaining funds from a separate estate fund.

“The new programme shows the central government’s support for municipalities and is credit positive for local governments and public sector Pfandbriefe,” said the rating agency. “Municipal debt accounts for 28% of cover pool assets of the German public sector Pfandbriefe that we rate.”

Moody’s noted that German municipalities, with aggregate outstanding debt of Eu135bn, traditionally fund their investments and general expenses with bank loans. More than 50% of such debt is refinanced via public sector Pfandbriefe, according to the rating agency, and exposure to municipal debt constitutes more than 50% of the cover pools of five of the 17 public sector programmes Moody’s rates. It said that Deutsche Kreditbank will benefit most from the initiative since 81% of its cover pool comprises direct claims and claims guaranteed by municipalities, and 56% of the obligors are in the five East German Länder.

The German government’s initiative is aimed at supporting the investment behaviour of such weaker states, according to Moody’s, which noted that this has a knock-on effect on the quality of regional infrastructure and hence the respective regions’ attractiveness to companies and the workforce.