Interest rate turnaround tears big holes in municipal finances

Kleinmachnow, 15 September – Rising interest rates mean: Times are getting tougher for debtors – and that also applies to municipalities. According to a calculation by EDS European Debt Solutions GmbH, the rise in interest rates is costing them more than 400 million euros – per year. “Many a treasurer now has to start looking for alternatives,” says Sebastian Bergmann, Managing Director of EDS.

The low interest rates have relieved municipalities of some financial worries in recent years. In the face of negative interest rates, debt even brought them positive returns. “Those times are now over,” says Bergmann.

To combat the high inflation rates, the European Central Bank (ECB) has initiated the interest rate turnaround and raised its key interest rate by 0.75 percentage points in September. Further interest rate steps are in the pipeline, according to ECB directors. Market interest rates have been on an upward trend for some time: the current yield on German bonds has been rising since December last year, and in March 2022 it became permanently positive again, reaching around 1.5 per cent in mid-September.

EDS has calculated what this means for the municipalities: With total debts of around 32 billion euros (as of the end of 2021), the negative interest rate flushed around 180.4 million euros into the municipal coffers. With rising interest rates, this flow of money turned around. “From the beginning of the year to the beginning of September alone, the municipalities had to pay an estimated 238.1 million euros in interest,” says Bergmann.

180.4 million euros in revenue turned into 238.1 million euros in expenditure: a delta of around 419 million euros that has to be covered. “Some municipalities are now faced with the task of finding favourable refinancing sources,” says Bergmann.