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Rating action

Scope Ratings GmbH (Scope) has today affirmed the Free State of Bavaria’s long-term issuer rating at AAA and short-term issuer rating at S-1+. Scope has also affirmed the sub-sovereign’s senior unsecured debt at AAA. All ratings are expressed in both local and foreign currency. All Outlooks are Stable.

Key rating drivers

The German federal institutional framework under which all German Länder operate is highly integrated, resulting in a strong alignment of the German Länder’s ratings with the federal government’s AAA-rating. Key elements of the framework include: i) a robust revenue equalisation mechanism; ii) wide-ranging participation of the Länder in national legislation, including veto rights; iii) equal involvement of the Länder in federal reforms; and iv) a solidarity principle that ensures extraordinary system support in budgetary emergencies.

A further key element of the institutional framework is the constitutional debt brake, which limits structural deficits. Budgetary practices under this rule were impacted by the Federal Constitutional Court’s ruling from 15 November 2023 on the Second Supplementary Budget Act 2021 of the federal government. The ruling effectively limits the budgetary practice of using emergency credit authorisations to create budgetary reserves for future spending related to such an emergency, which was also commonly used by Länder governments since 2020, thus also impacting budgetary practices of the Länder.

Recent amendments to Germany’s fiscal framework, including the easing of the debt brake, now allow the Länder collectively to run a structural deficit of up to 0.35% of national GDP and to access up to EUR 100bn in federally sourced infrastructure funding. While this provides additional fiscal capacity, it also reflects a shift toward a more expansionary fiscal stance. Scope expects operating balances across the Länder to remain under pressure, having declined from pre-pandemic levels due to higher personnel and administrative costs as well as slower economic momentum. These factors suggest a shift toward moderately higher deficits, though within a still-supportive institutional and fiscal framework.

Bavaria benefits from a strong individual credit profile with the following credit strengths: i) a low debt burden; ii) excellent capital market access; iii) ample liquidity including high cash reserves; iv) strong budgetary performance with an above-average expenditure flexibility; and v) a wealthy and highly competitive economy.

Bavaria benefits from very low debt and excellent capital market access. Bavaria’s very low debt-to-operating balance relative to peers positions the state favourably in terms of fiscal resilience and budgetary flexibility. The state repaid most of its maturing debt without recourse to credit authorisations in recent years, underpinned by high own cash holdings. Pandemic-related borrowing increased debt to 29% of operating revenue (EUR 19.9bn) at end-2021, up from 20% in 2019. The ratio recovered in subsequent years, declining to 25% at end-2023, but remained stable in 2024 as the debt stock increased slightly while operating revenues also increased.

Bavaria has consistently supported the federal debt brake and maintained a policy of zero net new borrowing, reflecting its long-standing commitment to fiscal discipline. In light of the challenging economic outlook and the need to boost investments, Bavarian State Premier Markus Söder has signalled that new debt issuance may be appropriate in 2026. Scope projects debt to increase moderately over the coming years, while the debt-to-operating revenue ratio should remain relatively stable, supported by a concurrent recovery in tax revenues. A potential economic boost from the loosening of fiscal rules in Germany could set the debt-to-operating revenue ratio for Bavaria on a declining path though the extent of the impact will depend on broader fiscal conditions. In line with previous years, Bavaria used cash to service its debt in 2023 and increased its postponed credit authorisations by EUR 1,240m to EUR 19.2bn.

In response to the Covid-19 crisis, Bavaria passed legislation to invoke the safeguard clause of its debt brake. Pandemic-related funds have been collected under a dedicated account (chapter 13 19 Sonderfonds Corona-Pandemie) in the Land’s core budget. Actual debt take-up amounted to EUR 10.2bn over 2020-2022 and was hence significantly lower than the authorised volumes of EUR 37.4bn. In the 2023 budget, no new credit authorisations were included and the Land permanently redeemed EUR 300m, EUR 250m more than the budgeted volume of EUR 50m.

Credit authorisations under the debt brake emergency clause come with a pre-defined redemption plan. Bavaria planned to amortise debt taken on under chapter 13 19 in annual instalments of 5% of the total amount incurred. The Budget Act 2024/2025 limits planned repayments to EUR 50m in 2024 and the same amount in 2025 given the challenging short-term economic outlook. Any pandemic-related debt still outstanding at the end of 2025 will be repaid in equal instalments with the debt fully paid off by 2044. As actual take-up of debt was substantially lower than budgeted, mandatory redemptions should stay well below EUR 1bn per year.

Funding access in capital markets is excellent as observed during the Covid-19 crisis. The state re-entered the bond markets in 2020 and 2021 for the first time since end-2014, issuing mostly at near-zero coupons. Total net credit market borrowing amounted to EUR 7.2bn and EUR 3.4bn respectively in 2020 and 2021, including bond issuances, private placements and promissory notes. In 2022 and 2023 the state did not access public debt markets, reflecting low financing needs. After a benchmark emission of EUR 500m at end-2024, Bavaria accessed bond markets again in early 2025 for a volume of EUR 1bn. Bavaria employs a conservative debt-management strategy with no foreign currency exposure and low interest rate risk. The debt service profile is balanced with around one-third of debt maturing in the next five years.

Bavaria’s AAA rating is further underpinned by its sizeable cash reserves. Bavaria’s liquidity management is prudent and supported by appropriate inter-year cash planning, diverse liquidity sources, and ample reserves. Liquid reserves as a share of debt service are one of the highest among German Länder. Access to external liquidity, if required, is available at short notice via credit facilities from major financial institutions. German Länder lend excess liquidity to each other via commercial cash transactions, generating another source of liquidity. Combined with Bavaria’s own sizeable reserves, this makes the risk of a liquidity shortfall negligible.

The AAA rating also reflects prudent fiscal management by the Bavarian administration. The state displays a strong budgetary performance, with historically high operating surpluses averaging 12.9% of operating revenue in 2015-2019. This performance was underpinned by strong tax revenue growth, continuous cost control and conservative budget management, which have supported a substantial reduction in debt and a build-up of cash reserves.

After years of budgetary surpluses and net debt reduction, budgetary results in 2020 and 2021 were driven by the Covid-19 pandemic. Due to greater uncertainty and efforts to increase operational flexibility, Bavaria passed one-year budgets for 2021, 2022 and 2023, instead of the usual two years as reintroduced for 2024/2025.

Expenditure growth outpaced revenue growth in 2024 and operating pressures are set to persist in 2025 as economic growth remains weak, which is expected to lead to subdued tax revenues. Planned total expenditure was increased under the Supplementary Budget Act 2025, driven partially by higher spending to support municipalities, while the allocation of EUR 460.5m to the economic stimulus reserve originally anticipated in the budget was suspended. Nevertheless, the 2025 budget continues to be balanced without any new net borrowing, and investments remain high with capital expenditure as a share of total expenditure rising to around 14%.

Like other German Länder, Bavaria will continue to face budgetary pressures in 2025 and beyond. Operating expenditure growth is forecast to average 3.9% over 2025-2028, while operating revenue growth is expected to average 1.9%. In response to these budget pressures, the Supplementary Budget Act 2025 already stipulates a general moratorium on public sector jobs for 2026 and the start of a gradual reduction of 5,000 positions by 2030. Given Bavaria’s strong budget discipline and track record, Scope therefore anticipates additional consolidation measures in the 2026/27 budget.

Bavaria’s AAA credit profile further benefits from a wealthy, well-diversified and highly competitive economy, which constituted 18% of German GDP in 2024. This results in a robust regional growth potential and a strong ability to consistently generate its own revenues. The state is one of the wealthiest regions in Europe, with a GDP per capita at 116% of the German average.

Bavaria’s real GDP declined by 4.1% in 2020, in line with the German average. The economic recovery in 2021 and 2022 was robust and above the national average with 4.2% and 1.9% real GDP growth respectively. This was despite the impact of global supply chain disruptions, as well as high energy prices and other economic effects of the Russian invasion of Ukraine. Bavaria’s economy also slightly outperformed the German economy over 2023 and 2024, with economic output first increasing and then declining by 1%, while the German economy contracted by 0.3% and 0.2% in the two years.

Bavaria enjoys favourable labour market characteristics, even though the Covid-19 shock caused the unemployment rate to increase to a high of 4.2% in February 2021, from 2.8% in December 2019. In May 2025, the unemployment rate stood at 3.9%, 1.1pp above its 2019 level. Robust labour market outcomes over the course of the pandemic and energy shocks reflect the federal government’s large discretionary support, e.g. in the form of a national furlough scheme, or Kurzarbeit. While the unemployment rate remains above pre-pandemic levels and has gradually increased since 2022 amid a subdued economy, Bavaria has the lowest unemployment rate among all German Länder and enjoys positive demographic developments, supporting its long-term growth and tax revenue potential.

The main rating challenges are limited expenditure flexibility due to elevated spending pressures in the near-term, sizeable but manageable contingent liabilities and a high pension burden weighing on long-term expenditure flexibility.

Bavaria’s flexibility to adjust expenditure is moderate, as minimum legislative requirements and the socially sensitive nature of several expenditure items limit the ability to cut spending. Inflexible spending items comprise personnel (around 45% of operating expenditure in 2023 and 2024) and transfers (also around 45%), including to municipalities. Scope expects personnel expenditure to rise from EUR 29.2bn in 2024 to EUR 33.9bn in 2028.

Challenges also relate to Bavaria’s sizeable though low-risk contingent liabilities. The Land’s shareholding of BayernLB bank increased from 75% to 80% following the conversion of its silent participation into regular equity capital in December 2024. Financial risk stemming from the state’s exposure declined in 2017 after BayernLB repaid its state aid in full. The bank’s balance sheet is strong with: i) a solid capital base, reflected by a CET1 capital ratio of 21.1% in March 2025, well above the regulatory requirement (9.5% minimum for 2025); and ii) a low NPL ratio of 1.1%. In addition, Bavaria’s strong management of its shareholdings is reflected in good overall annual financial results in past years. The Covid-19 crisis hindered the profitability of several holdings in 2020 and 2021, with Bavaria providing support via loans or capital injections. These holdings have recovered strongly since then, particularly the Messe München GmbH which has seen record revenues due to a large increase in demand for trade fairs and conference events.

Over the long term, Bavaria’s budget is burdened by high pension payments, placing structural pressure on expenditure flexibility. To ease the rising pressure from pension obligations, Bavaria has: i) implemented cost-saving measures; ii) pursued prudent fiscal policy; and iii) created a pension fund, which was endowed with EUR 4.0bn at end-2023. Overall, the combined measures, including the anticipated savings, would result in a moderate share of pension expenditure with a peak of 10%-12% of budget, broadly in line with levels in 2018.

Outlook and rating sensitivities

The Stable Outlook represents Scope’s view that risks to the ratings over the next 12 to 18 months are balanced.

Downside scenarios for the ratings and Outlooks are (individually or collectively):

1. The German sovereign rating/Outlook were downgraded;
    
2. Changes to the institutional framework were to result in a notably weaker individual credit profile;
    
3. The individual credit profile deteriorated significantly and structurally.

Institutional framework assessment

Scope’s institutional framework assessment determines the intergovernmental integration between sub-sovereigns and their rating anchor, which is the sovereign or a higher-tier government. To perform this assessment, Scope applies the Institutional Framework scorecard (QS1), centred on six analytical components: i) extraordinary support and bailout practices; ii) ordinary budgetary support and fiscal equalisation; iii) funding practices; iv) fiscal rules and oversight; v) revenue and spending powers; and vi) political coherence and multilevel governance.

Scope considers the institutional framework under which the German Länder operate to display ‘full’ integration for: i) extraordinary support and bailout practices; ii) ordinary budgetary support and fiscal equalisation; iii) fiscal rules and oversight; iv) revenue and spending powers; and v) political coherence and multilevel governance. The institutional framework displays ‘medium’ integration for funding practices. Consequently, Scope’s assessment results in an indicative downward rating distance of up to one notch between the German sovereign (AAA/Stable) and the rating of an individual state.

Individual credit profile

Scope assesses the individual credit profile based on quantitative and qualitative analysis of four risk categories: i) debt and liquidity; ii) budget; iii) economy; and iv) governance. These are further complemented by additional adjustments for environmental and social factors & resilience.

The outcome of these assessments, as reflected in the application of the Individual Credit Profile scorecard (QS2), is an individual credit profile score for Bavaria of 90 out of 100.

The mapping of this score to the range defined by the Institutional Framework assessment results in an indicative rating for Bavaria aligned with the sovereign rating, corresponding to an AAA indicative rating.

The review of potential exceptional circumstances that cannot be captured by the Institutional Framework and Individual Credit Profile scorecards did not lead to further adjustments. As such, the final rating corresponds to the indicative rating of AAA.

The results have been discussed and confirmed by a rating committee.

Environmental, social and governance (ESG) factors

ESG factors material to Bavaria’s credit quality are captured by Scope’s rating approach through several analytical areas.

Scope’s assessment of Germany’s sovereign credit quality includes an appraisal of ESG risks, as detailed in Scope’s Sovereign Rating Methodology.

Governance considerations are material to Bavaria's rating and are included in Scope’s institutional framework assessment and its assessment of Bavaria’s individual credit profile. These highlight the high quality of governance alongside the administration’s record of sound liquidity and debt management practices.

The institutional framework assessments capture governance factors under fiscal rules and oversight, assessed as ‘full integration’ for the German Länder. This reflects the comprehensive and credible fiscal framework in the form of the debt brake, as well as the strong oversight role of the Stability Council. Governance factors are also captured under political coherence and multilevel governance, assessed as ‘full integration’, reflecting Germany’s predictable and supportive federal system, where any major reforms are discussed and agreed upon well in advance and in consultation with the Länder.

The individual credit profile captures governance factors under the quality of governance and financial management, where Bavaria is assessed as ‘stronger’ relative to peers, reflecting the region’s i) record of nominal debt reduction; ii) regular fulfilment of policy objectives defined in strategic plans; and iii) ability to weather economic downturns by cutting costs to compensate for adverse budgetary developments.

Social considerations are included in Scope’s assessment of Bavaria’s ‘economic sustainability. Bavaria benefits from a healthy labour market with low unemployment rates and favourable demographics compared to other Länder, supporting its long-term growth and tax revenue potential.

Additional environmental and social factors can be material for sub-sovereign creditworthiness beyond what is already captured in other sections of the methodology. However, in the case of Bavaria, no additional adjustments to the individual credit profile apply for social and environmental factors & resilience beyond what is already reflected under other risk pillars.

Nevertheless, Scope notes Bavaria’s need to support its citizens in the context of rising pressures on housing affordability. Additionally, Scope acknowledges ambitious policy objectives to achieve a reduction of CO2 emissions per inhabitant in Bavaria by 65% relative to 1990 levels by 2030 and achieve climate neutrality by 2040, though this target is expected to be delayed to 2045.

Rating Committee
The main points discussed by the rating committee were: i) institutional framework for German Länder; ii) debt and liquidity profile; iii) budget performance, revenue and expenditure flexibility; iv) economic developments; v) governance, regional socioeconomic and environmental risks; and vi) peer comparison.

Methodology
The methodology used for these Credit Ratings and Outlooks, (Sub-Sovereigns Rating Methodology, 11 October 2024), is available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other Services’, published on https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://scoperatings.com/governance-and-policies/regulatory/eu-regulation. Also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope Ratings’ definitions of default and Credit Rating notations can be found at https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Guidance and information on how environmental, social or governance factors (ESG factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The Outlook indicates the most likely direction of the Credit Ratings if the Credit Ratings were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The Rated Entity and/or its Related Third Parties participated in the Credit Rating process.
The following substantially material sources of information were used to prepare the Credit Ratings: public domain and the Rated Entity.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting these Credit Ratings originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Ratings and Outlooks and the principal grounds on which the Credit Ratings and Outlooks are based. Following that review, the Credit Ratings and Outlooks were not amended before being issued.

Regulatory disclosures
These Credit Ratings and Outlooks are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and Outlooks are UK-endorsed.
Lead analyst: Eiko Sievert, Executive Director
Person responsible for approval of the Credit Ratings: Jakob Suwalski, Executive Director
The Credit Ratings/Outlooks were first released by Scope Ratings on 12 July 2019. The Credit Ratings/Outlooks were last updated on 23 February 2024.

Potential conflicts
See www.scoperatings.com under Governance & Policies/Regulatory for a list of potential conflicts of interest disclosures related to the issuance of Credit Ratings, as well as a list of Ancillary Services and certain non-Credit Rating Agency services provided to Rated Entities and/or Related Third Parties.

Conditions of use / exclusion of liability
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