Corona Aid Package 2020 for Municipalities and Considerations Regarding Funding Aspects …

A comprehensive Corona 2020 aid package for cities and municipalities worth EUR 1 billion has just been launched. Nevertheless or precisely because of this, the municipalities will need efficient credit conditions in the current crisis. We guarantee this for our numerous customers with our expert knowledge and partnership-based support for loan tenders, including ongoing financing controlling, also digitally.

In the run-up to the aid package, the idea of ​​cities and municipalities came again to refinance through the Austrian Federal Finance Agency (OeBFA). This idea, which I have been paying attention to for years, is a few decades old and has always been viewed critically by the federal government.
In the following, I would like to examine this situation, which has obviously not changed over the years, as part of an overall view of the “Group Republic of Austria AG”.

As is well known, the Republic of Austria will take up essential parts for financing the Corona aid packages with many billions on the capital market via international investors. Hopefully the tried and tested system through OeBFA will continue to ensure efficient borrowing. The federal government also has a mature financing structure with a sustainable debt management strategy. Most of the republic’s bonds have a fixed interest rate. The federal states can also benefit from the activities. Nevertheless, almost all federal states (some with their own external ratings) also have their own refinancing activities.

Large amounts are involved for the municipalities, but for the republic in relation to the total debt level it is a small volume with possibly large effects. The debts of the municipalities, which without the city of Vienna amount to only approx. As is well known, 3% of total government debt is predominantly subject to variable interest rates [1]. In the event of undesirable developments in the communities, this can have an overall negative impact on the creditworthiness of the Republic of Austria. The cities and municipalities generally do not have an external capital market rating. In addition, it must be mentioned that, as is well known, there is no constitutional obligation to assist municipalities, and thus at least legally a bankruptcy of a municipality is not excluded [2]

In economic terms, it cannot be denied that the federal government, with its excellent credit rating and the ratings derived from it, as well as sustainable transactions, can fund itself cheaper than the municipalities, also by using other instruments. In addition to any risk costs, however, the organization or support of the transfer of funds to over 2,000 municipalities as well as possible costs of interest rate swaps or other transaction costs would have to be taken into account. In addition, the flexibility of the communities would decrease significantly. There would be practically only “money off the shelf” and no tailor-made financing conditions, as we see in almost all municipalities and their projects every day.

The creditors of the municipalities will therefore continue to be predominantly Austrian financing partners with a connection to the region. This applies all the more if the constitutional duty to provide assistance is not implemented, which is more likely. We were able to derive great benefits from these sustainable customer partnerships between the municipalities and banks in the municipalities we serve, even in the financial and euro crisis. I assume that this will again prove itself in the current crisis situation. The municipalities therefore need the banks and the banks the municipalities. Current discussions with our customers and their financing partners confirm our assessment. Partnerships are in demand again, also with municipalities and banks.

In my view, if the municipalities were refinanced through OeBFA, the overall economic disadvantages for the “Group Austria AG” could outweigh them. Nevertheless, efficient and partnership-based borrowing should be guaranteed in the cities and municipalities. I am therefore convinced that within the framework of efficient financing controlling, many municipalities should also gain significantly greater advantages with existing financing than they could achieve on balance with a theoretical refinancing of new debts via OeBFA; and this with full flexibility of the communities.

I can make this statement by analyzing approx. Confirm five hundred proofs of debt that I have carried out across Austria in the past few months. A variety of measures lead to success. In addition to consistent monitoring of long-term financing and ongoing support for the loan portfolio, I am thinking above all of the possible introduction of existing financing to the current market and a possible switch to fixed interest rate agreements. Possible savings of 0.5% up to approx. 1% of interest payments per year were not uncommon. If one follows supreme court decisions and assumes that the total interest cost of loans (indicator plus premium) cannot fall below 0%, an interest rate of 0.70% p.a. fixed for 20 years quite attractive for communities. In addition, the community’s interest rate risk would decrease significantly (or possibly be completely eliminated) and planning security would increase.

I almost forgot: Supplements for variable financing are currently around. 0.50% (with a lower limit of 0%) but sometimes fixed interest rates are even lower with shorter terms.

We are happy to assist you at [email protected].

[1] vgl. Bericht über die Öffentlichen Finanzen 2018 – 2020, Dezember 2019, Fiskalrat, und eigene Recherchen

[2] vgl. Dr. Martin Huber, 

About The Author

Heinz Hofstaetter
Over 20 years of international experience in senior management positions in the areas of consulting, banking, finance, asset management, valuation and Real Assets.