OREANDA-NEWS. January 16, 2013. Following the complete phase-out of the recovery package the weakness in municipal investment in Germany is continuing. This is clearly indicated by the results of the current KfW Quick Survey of Municipalities, a survey of about 250 municipal decision-makers. According to the survey, a sustainable upturn in municipal investment activity is not expected in the coming six months.

The demand for municipal investment loans is a mirror image of investment activity: against the background of continuing investment weakness, demand remains weak and will not improve until mid-year. In contrast, the demand for municipal cash credit remains at a high level - which harbours significant refinancing risks as soon as interest rates rise. For years, borrowing of cash loans has been focused in the four federal states of North Rhine-Westphalia, Rhineland-Palatinate, Saarland and Hesse, and makes a significant contribution to the increase in total municipal borrower debt.

Cities, municipalities and districts with financing needs continue to rely on an overall intact municipal loan market: in the next six months, the surveyed financial experts expect the favourable borrowing conditions to continue for both investment and cash loans. In particular, those surveyed continue to expect low interest rates.

The majority of municipalities see their overall financial situation as difficult: almost half of those surveyed (46%) see their finances as inadequate, another 18% only as unsatisfactory. Their expectations for the near future also paint a rather gloomy picture. About 60% of the surveyed municipal financial experts expect an adverse development. The financial gap among municipalities is growing: those cities and municipalities that currently rate their financial situation as inadequate expect things to worsen in the near future; in contrast, municipalities in a favourable situation are optimistic about the future.

"Overall, the weakness in municipal investment is continuing, while total borrower debt is climbing. We are observing this with concern. Moreover, the financial gap among municipalities continues to grow. This requires fundamental reforms on both the revenue as well as the expenditures side," said Dr Jorg Zeuner, Chief Economist of KfW Bankengruppe. "It is necessary to reform the municipal financing system with the aim of reducing structural deficits through higher revenues that are less dependent on economic trends. The distribution of tasks between the federal government, the federal states and the municipalities also needs to be adjusted based on our current needs. For higher investments the municipalities must undertake their own fiscal consolidation efforts," explained Dr Zeuner. It would also be desirable for municipalities to cooperate more and for more municipalities to merge. "A sustainable solution can only be successful if all participants - the federal states and the municipalities - all work in concert," summarised Zeuner.