Local governments are almost certainly paying a premium when they raise debt by themselves – which they are doing in large and increasing volumes. Last year, Europe’s regional governmental (‘sub-sovereign’) debt stood at more than €1,200bn.
Particularly stung are Russia and France, which comprise between them the entire top 20 worst affected sub-sovereign debt holders. By contrast, two Spanish communities actually benefit – with better sovereign ratings than central government. Perhaps the Spanish government should be borrowing from them.
Today, S&P released their sub-sovereign ratings list – 142 debt-holding regional government outfits from 22 European countries. I was amazed to see Woking held debt. This, I thought, calls for a chart. But amazingly there are more interesting stories even than Woking. Before we delve into the detail, one caveat: only 70 per cent of sub-sovereign debt is made up of bonds, whose repayment cost will most likely be affected by the rating. The rest comprises loans from the central government (which as we shall see may be the best option) and municipal debt in Nordic countries. I don’t know which 70 per cent that is so couldn’t exclude the remaining 30 per cent.
So, the basics. Germany holds the lion’s share of regional debt, although that proportion has fallen over the past three years, as the rise in total debt has outpaced Germany’s increase:
Spain and Germany are increasing their regional debt the most, in euro terms. Norway and Turkey have increased the most in percentage terms in 2008-2009. And Turkey and Lithuania have increased the most over three years, at 172 and 134 per cent, respectively (from a very small base, in Lithuania’s case).
So, specifics. Who’s paying more than they would be if financed by the central government?
Well, the worst discrepancies are for the City of Dzerzhinsk and Tomsk Oblast, both in Russia: in each case the sub-sovereign rating is B-, eight points* below the sovereign rating of BBB+. I hope they are part of the 30 per cent receiving loans from the central government and not issuing bonds.
Two autonomous regions in Spain, by contrast, are doing rather well. The Basque country and Navarre are both one increment higher than the Spanish state. Please see table for more:
*I constructed points for my own amusement, to be able to rank the difference. I gave rating D one point, and all incremental rankings one more point, until AAA which was 22.
