Mr. Christian Esters

"The cost-cutting implemented over the past two years has not been sufficient to meet the substantial challenges that German state budgets face in the medium term," said Standard & Poor's credit analyst Christian Esters.

Christian Esters, Frankfurt (49) 69-3 39 99-242 Copyright (c) 2003, Standard & Poor's Ratings Services

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"Under this system, due to go into effect in 2007, enhanced mutual support and lower exposure of budgetary performance to local economic strength could gain in significance as rating factors," forecasts Standard & Poor's credit analyst, Christian Esters.

"Nevertheless, the expected budget effects on individual cantons differ and specific rating impact on individual Swiss cantons cannot be evaluated at this stage," he added.

"Under this system, due to go into effect in 2007, enhanced mutual support and lower exposure of budgetary performance to local economic strength could gain in significance as rating factors," forecasts Standard & Poor's credit analyst, Christian Esters.

"Nevertheless, the expected budget effects on individual cantons differ and specific rating impact on individual Swiss cantons cannot be evaluated at this stage," he added.

"The budget revisions of May and June this year, however, do not fully reflect future potential financial pressure from the crisis at Szczecin Shipyard," said Standard & Poor's Public Finance credit analyst Christian Esters.

Although Szczecin is not greatly exposed to the problems at the shipyard in terms of expenditure (central government finances social welfare benefits, while any related city budget expenditure would be discretionary), the city's revenues partly depend on the state of the local economy.

Municipal taxes (other than real estate tax), which accounted for 35.0% of Szczecin's operating revenues in 2001, are unlikely to be affected substantially.In addition, however, the city receives a percentage of the national taxes--28.6% of personal income taxes and 5.0% of corporate taxes--collected by central government on its territory.The city's share of these contributed 18% to its operating revenues in 2001.

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Owing to the Polish intergovernmental tax distribution system, these shortfalls would not occur in 2002 but after a sufficient delay, allowing for expenditure adjustments if necessary," Mr. Esters explained.

Standard & Poor's will continue to monitor the impact of the ongoing crisis on the city's finances.Increased expenditure, due to discretionary transfers to individuals or companies affected by the shipyard's problems, may put the city's financial performance under pressure.In addition, a reduced structural deficit in 2003 would support the current ratings, since asset sales should not be considered a sustainable way to cover negative budgetary balances.ANALYTICAL E-MAIL ADDRESSES christian esters@standardandpoors.com myriam fernandez@standardandpoors.com PublicFinanceEurope@standardandpoors.com

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