Rating action

Scope Ratings GmbH (Scope) has today affirmed the Land of Berlin’s (Berlin) local- and foreign-currency long-term issuer and senior unsecured debt ratings at AAA. Scope has also affirmed the local- and foreign currency short-term issuer ratings at S-1+. All Outlooks are Stable.

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Key rating drivers

The closely integrated German federal framework results in a close alignment of Länder’s ratings with the Bund’s AAA/Stable rating. Key elements of the framework include: i) a strong revenue equalisation mechanism; ii) wide-ranging participation of the Länder in national legislation and veto rights; iii) equal involvement of the Länder in negotiations on 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. The ruling also affected Berlin’s budgetary strategy, with the Land cancelling its plans for a debt-funded EUR 5bn climate special fund.

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.

Berlin’s individual credit profile with the following credit strengths: i) conservative budgetary management and a track record of fiscal consolidation; ii) excellent capital market access and a favourable debt profile; iii) prudent liquidity management; and iv) a strong socio-economic profile.

Track record of fiscal consolidation and conservative budgetary management. Berlin has demonstrated a strong track record of fiscal consolidation over the past decade. Between 2012 and 2019, expenditure growth was tightly controlled, with annual increases in operating expenditure broadly in line with revenue growth. This prudent approach enabled the Land to generate high operating surpluses averaging 14% of operating revenue and post surpluses after capital expenditure and interest averaging 2.6% of total revenue. These consistent surpluses facilitated the build-up of fiscal buffers and supported a gradual reduction in the debt stock relative to revenue.

Despite a weakening of fiscal performance during the Covid-19 pandemic in 2020–2021, Berlin maintained its commitment to budgetary prudence. While the operating margin fell to an average of 5.9% and the Land posted overall deficits of 2.5% of revenue, Berlin retained a conservative spending stance and preserved budgetary reserves. In 2022, strong tax receipts contributed to a surplus of 2.0% of total revenue, positioning the Land to mitigate deficits expected over 2023–2025.

The fiscal response to more recent pressures further underscores Berlin’s disciplined budget management. In 2023, despite a 5.1% drop in operating revenue and rising costs, the Land proactively reduced its debt-related burden by prepaying EUR 810m in redemption obligations (substantially above the legally required EUR 270m) by drawing from remaining reserves. This frontloading of obligations reflects Berlin’s forward-looking approach to managing liquidity and sustaining fiscal resilience amid elevated investment needs.

Berlin has initiated a multi-year fiscal consolidation strategy to counteract rising budgetary pressures. A third supplementary budget for 2025, adopted in December 2024, included EUR 3bn in expenditure cuts. In February 2025, the Senate adopted further annual savings targets of EUR 750m for the 2026/27 budget cycle and, for the first time, introduced binding expenditure ceilings for all departments. These measures aim to enhance spending discipline and support the Land’s commitment to a sustainable fiscal path within the amended debt brake framework.

Excellent capital market access, favourable debt profile and prudent liquidity management. Berlin benefits from a well-established presence in the European sub-sovereign bond market, reflected in strong investor demand and regular benchmark-sized issuance. In 2024, the Land issued EUR 8.0bn in new debt, with planned issuance for 2025 ranging between EUR 7.8bn and EUR 11.4bn. The strategy combines large, liquid benchmark bonds, typically in volumes of up to EUR 1.5bn and maturities of up to 30 years, with more flexible instruments, including floating-rate notes (EUR 1.05bn planned in 2025), puttable bonds, private placements, and taps of existing bonds.

Berlin’s issuance calendar in the first half of 2025 has been frontloaded, including EUR 5.5bn in benchmark bonds across different maturities and structures (fixed and floating rate). The Land also plans to issue its second sustainability bond in Q4 2025, supporting ESG-aligned investor demand. As of end-June 2025, Berlin had 91 outstanding bonds with a total volume of EUR 50.2bn, including 26 benchmark bonds exceeding EUR 1.0bn each. Total gross debt stood at EUR 68.9bn, with an average maturity of 8.66 years and a low average interest rate of 1.81%. Base case projections assume debt will slightly decline to EUR 68.1bn by year-end, with further funding calibrated to investor demand and cost considerations.

Berlin’s liquidity position is strong, supported by proactive treasury management and access to short-term credit facilities with major financial institutions. The Land also benefits from inter-Länder liquidity pooling arrangements, providing additional buffers for intraday liquidity needs. In Scope’s view, the risk of liquidity shortfalls remains negligible, further underlining Berlin’s financial flexibility despite elevated debt levels.

A strong economic base and favourable demographics. Berlin benefits from a dynamic and resilient economic structure that continues to outperform national peers. With a GDP of EUR 207.1bn in 2024 (accounting for 4.8% of Germany’s total economic output), the Land recorded the fourth-strongest growth rate among federal states (+0.8%) despite national GDP contracting by 0.2%.

As a service-oriented economy with limited energy-intensive industry, Berlin has been less exposed to recent energy price shocks. From 2014 to 2024, average annual GDP growth reached 2.72%, well above the national rate of 1.03%. Berlin is one of Germany’s foremost centres for innovation, characterised by high start-up activity and institutional support from universities and public development banks. In 2024, 31% of all venture capital invested nationally went to Berlin-based start-ups, supported by state support via IBB Ventures.

Per capita GDP stood at EUR 54,607 in 2024, exceeding the German average (EUR 50,819) for a seventh consecutive year. Berlin's economic expansion has been supported by steady population growth (+31,000 people per year on average from 2016–2022), driven by domestic and international migration. The working-age population is projected to grow by 0.35% annually until 2030, further enhancing the Land’s growth prospects.

Rating challenges are: i) high debt levels, ii) rising budget pressures with moderate budgetary flexibility, and iii) sizeable though largely low-risk contingent liabilities, including unfunded pension commitments.

Berlin’s debt is high compared to peers, but associated risks are mitigated by a favourable debt profile and excellent market access. In 2024, debt relative to operating revenue rose slightly to 187.6%, up from 185.2% in 2023, as revenue growth slowed and capital needs increased. While this remains below the pandemic peak of over 208% in 2020, it marks a reversal of the declining trend observed up to 2019.

Scope expects the debt trajectory to weaken moderately in the coming years as Berlin taps new borrowing space created under Germany’s amended debt brake. Based on projected borrowing, slower revenue growth, and persistent investment-driven deficits, Scope forecast the debt-to-operating revenue ratio to reach around 200% by 2028.

Despite the rising debt stock, interest payments remain manageable in 2024 at 2.0% of operating revenue, slightly down from 2.1% in 2023, due to Berlin’s still-favourable debt structure and refinancing conditions. However, the implicit interest rate is expected to rise from 1.1% in 2024 to 2.3% by 2028, gradually pushing the interest burden to 4.6% of operating revenue, limiting financial flexibility over the medium term.

Budgetary pressures with moderate budgetary flexibility, necessitating consolidation. Berlin’s post-pandemic fiscal path has shifted toward investment-led expansion, enabled by greater leeway under the amended debt brake. However, rising investment needs, higher interest costs, and moderating operating surpluses point to sustained overall deficits and rising debt, making consolidation essential to preserve long-term fiscal sustainability.

Berlin’s 2024 fiscal results reflect increasing pressure on both operating and overall balances. The operating margin declined from 5.7% to 4.1% of operating revenue, the lowest since the pandemic years, as expenditure growth outpaced revenue. Berlin’s overall deficit widened from 5.0% to 8.3% of total revenue in 2024, driven by record-high capital expenditure at 11.7% of total spending and the one-off, debt-financed acquisition of Berliner Wärme (BEW), highlighting the Land’s strategic shift toward investment-led growth and climate-focused infrastructure.

From 2025 onward, Scope expects deficits to persist despite Berlin’s continued commitment to consolidation. While the amended debt brake provides some additional headroom through financial transactions and cyclical components, consolidation remains key. Scope expects operating margins to gradually recover to 5.8% in 2025 and stabilise near 6.9% by 2028, though pre-financing deficits are projected to average around 10% of total revenue over the same period. Over the medium term, Scope expects Berlin to maintain its fiscal trajectory anchored in consolidation and conservative expenditure control, supported by structurally low debt servicing costs and relatively stronger economic and demographic fundamentals compared to national peers.

Berlin’s budgetary flexibility remains structurally limited, reflecting the broader constraints faced by German Länder. The Land’s revenue autonomy is low, with the majority of operating revenue derived from shared taxes, particularly VAT and personal income tax, which are distributed through the federal equalisation system. On the expenditure side, flexibility is curtailed by a high share of mandatory spending: personnel costs alone accounted for around 34% of operating expenditure in 2024, with further rigidity stemming from legally mandated transfers to districts, education, housing, and transport. These constraints reduce Berlin’s ability to adjust spending in response to short-term fiscal pressures.

Finally, Berlin is exposed to some contingent liability risks, although the overall impact on its individual credit profile is low. Main contingent liabilities stem from: i) contractual guarantees mostly for utilities, housing, and the airport, ii) strategic shareholdings, and iii) largely unfunded pension liabilities.

Berlin’s contractual guarantees are moderate, totalling EUR 5.2bn in 2024 (around 7% of direct debt), with limited risk of crystallisation onto the Land’s balance sheet.

Berlin’s shareholdings play a critical role in the state’s investment policy and, recorded a positive net result of EUR 220m in 2024, down from EUR 403m in 2023. While most profitable companies reported stable earnings compared to the previous year, losses increased notably, driven in part by one-off effects. Investment activity rose markedly, with total investment volumes increasing by nearly 30% to EUR 4.36bn in 2024, largely due to Gewobag doubling its investments and the land acquisition tied to the Tegel project. Total financial debt at state-owned entities rose 11% to EUR 31.3bn, reflecting the partial debt-financed acquisition of BEW. This increase was matched by coherent growth in fixed assets, which rose 8% to EUR 54.4bn, around half of which is attributable to the state’s housing companies.

Finally, Berlin, like other German Länder, faces significant unfunded pension liabilities for its civil servants, with future obligations exceeding EUR 70bn against pension fund assets of EUR 1.4bn at end-2023. Annual contributions of EUR 80.5m serve to build a buffer for peak payments, with withdrawals allowed from 2031. The pension fund is not intended to fully cover liabilities, and the retirement age is gradually increasing from 65 to 67.

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. Downgrade of Germany’s sovereign rating/Outlook;
    
2. Changes in the institutional framework resulting in notably weaker support;
    
3. The individual credit profile weakened 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 Berlin of 50 out of 100.

The mapping of this score to the range defined by the Institutional Framework assessment results in an indicative rating for Berlin 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 Berlin’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 Berlin’s rating and are included in Scope’s institutional framework assessment and its assessment of the Land’s individual credit profile. These highlight the high quality of governance alongside the administration’s record of sound liquidity and debt management practices, in line with other sector peers.

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 Berlin is assessed as ‘stronger’, reflecting its i) track record of nominal debt reduction and build-up of budgetary reserves before the Covid-19 pandemic and a commitment to return to structurally balanced budgets; ii) regular fulfilment of policy objectives defined in strategic plans; and iii) ability to adjust expenditure to compensate for adverse budgetary developments.

Social considerations are included in Scope’s assessment of Berlin’s ‘economic sustainability’ and ‘social factors and resilience’ , highlighting a healthy labour market and favourable demographics, but also the need to support its citizens in the context of rising pressures on housing affordability. Alongside the assessment of rating-relevant credit risks, Scope also considers long-term environmental developments that did not play a direct role in this rating action.

Berlin is advancing its sustainability agenda through targeted investments in housing, transport, and energy. In affordable housing, it enforces rent controls, prioritises access for low-income households, and reinvests profits from state-owned housing companies, supported by social bond issuance. The mobility transition includes a 90% increase in public transport subsidies by 2028, full electrification of the bus fleet by 2030, and major tram and U-Bahn expansions. Berlin has also acquired its electricity and district heating networks, committing to large-scale investments to reduce CO₂ emission from heating, which account for nearly half of the city’s total.

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

Rating Committee
The main points discussed by the rating committee were: i) institutional framework; ii) debt burden, liquidity profile and contingent liabilities; iii) debt management strategy; iv) budgetary performance and flexibility; v) regional socio-economic and demographic developments; vi) peer comparison; and vii) environmental and social factors.

Methodology
The methodology used for these Credit Ratings and/or 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/or Outlooks and the principal grounds on which the Credit Ratings and/or Outlooks are based. Following that review, the Credit Ratings and/or Outlooks were not amended before being issued.

Regulatory disclosures
These Credit Ratings and/or Outlooks are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and/or Outlooks are UK-endorsed.
Lead analyst: Jakob Suwalski, Executive Director
Person responsible for approval of the Credit Ratings: Eiko Sievert, Executive Director
The Credit Ratings/Outlooks were first released by Scope Ratings on 14 July 2017. The Credit Ratings/Outlooks were last updated on 9 August 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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