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Swiss Credit Market 2020: How are the Swiss cantons and cities?

Credit Suisse publishes the Swiss Cantons Handbook 2020

This year's assessment of the creditworthiness of all 26 cantons and six selected cities confirms almost all ratings as published in the 2019 edition. Credit Suisse's credit analysts come to this conclusion following a survey on the impact of COVID-19 on the creditworthiness and outlook of Swiss cantons and cities. The two negative rating actions are unrelated to the corona pandemic. The rating of the Canton of Valais is now one notch lower and the rating outlook for the Canton of Basel-Land changed to Negative.

COVID-19 and its economic repercussions have been affecting the way we live in multiple ways for several months and have made 2020 truly unprecedented. They are affecting the way we live in more than one way. Countries, companies, and people are slowly coming to terms with the previously unfathomable impact of the pandemic and adjusting to it. In Switzerland, a reasonably swift recovery has started, but the Credit Suisse economists think it will carry a "tilted V" shape.

The impact of the COVID-19 crisis on cantonal and municipal finances undoubtedly represents a challenge, but is still hard to quantify. Credit Suisse analysts thus conducted a survey with cantons and cities to collect feedback on their expectations and plans to address this new situation, and they generously shared their views.

Financial strength and macroeconomic stability bolster credit quality and rating outlooks
As Credit Suisse analysts gather from the collected feedback, the main financial impact is expected to materialize in 2021 (and potentially beyond), in the form of lower corporate tax income. Many cantons and cities also incurred higher expenses in 2020 for emergency and support measures as few relied on state support only. Most cantons indicated that existing financial reserves, the special SNB dividend, and strict financial discipline should be sufficient to counter lower tax income. Curbing or postponing investments, increasing taxes, or raising new debt are generally not an option at this stage.

Based on these insights and the high credit quality of Swiss cantons and cities, Credit Suisse analysts have not made any COVID-19 related rating changes. Rather, their two negative rating actions this year are rooted in long-standing issues. They downgraded the Canton of Valais by one notch to Low AA (Stable) due to above-average indebtedness and weak business profile readings. Further, they assigned a Negative outlook to the Mid AA rating of the Canton of Basel-Land as indebtedness remains among the highest in the country due to the 2014 pension fund recapitalization despite improved financial performance. The ratings of cantons and cities benefit from generally healthy financial profiles, sound macroeconomics, and the AAA standing of the Confederation that underpins the cantons' credit quality through the Swiss financial equalization system.

About the Swiss Cantons Handbook 2020
The Credit Suisse Swiss Cantons Handbook provides a detailed assessment of the credit quality of all Swiss cantons and six Swiss cities. Research analysts at Credit Suisse apply their extensive research capabilities to evaluate the cantons' locational quality, their resource strength (i.e. potential to generate future tax revenues), their financial profile, and the financial strength of the cantonal banks. Based on the cantons' rating score derived from the Swiss Institutional Credit Research rating methodology, the research analysts assign a credit rating and a rating outlook to each canton. These ratings are used in the composition of benchmark bond indices in Switzerland, among other things. Swiss Institutional Credit Research ratings are long term in nature and look beyond short-term swings.

The Swiss Cantons Handbook 2020 is available upon request.