Municipal debt in France

Thousands Of French Towns Are Asking For Bailouts After Discovering Toxic Assets

Business Insider, 

24 February, 2012

The latest victims of the financial crisis: small towns in France.

At least 5,500 French towns have taken out toxic loans from the failed French-Belgian bank Dexia.

With no place to unload that debt, and no way to pay it back, these towns are suddenly under water.

“If the euro-zone crisis continues, it’s very possible that some towns in France go bust, like in the United States,” said Sofiane Aboura, associate professor at Paris Dauphine University.

Dexia was the first European bank to fall victim to the eurozone debt crisis. In 2008, France, Belgium and Luxembourg took control of Dexia with a $8.4 billion bailout — a move meant to secure the municipal lender.

Three years later, the bank required another rescue operation to deal with the sovereign-debt crisis. In October last year, France and Belgium agreed to split up Dexia’s operations.

But with Dexia gone, French towns are facing a gaping credit chasm. They have nobody to turn to in order to finance their investments.

Unlike US municipalities, French towns don’t have facilities to emit bonds. They relied heavily on Dexia for their financing purposes.

Dexia Credit Local, the Dexia branch charged with lending to local authorities, forecasts a massive credit crunch this year. French towns need close to $30 billion in loans, and only $15 billion have been found so far.

French towns argue they didn’t have the manpower or the sophistication to understand the risks they were taking.

One of those towns is Asnières, population 83,300, just outside of Paris.

Dexia had sold the town’s previous local council complex loans, with interest rates indexed to the yen-dollar foreign exchange rate or to US municipal bond rates.

In 2009, local officials in Asnières made a horrifying discovery: 91 percent of its $250 million debt was “toxic.” The loans were sold at low interest rates, but with a plan to phase in variable interest rates. When the variable rates came into effect, the town’s debt skyrocketed to a level they could no longer afford to repay.

“Dexia cheated local governments, they flogged these exotic financial products and small towns weren’t aware they were taking big risks,” Asnières’s mayor Sebastien Pietrasanta said.

It is estimated the small town of Asnières has to fork out $76 million — half the town’s annual budget — to secure its debt. And that’s before they start paying it off.

“I don’t have a room full of traders in my basement,” Pietrasanta said. “Some of the loans are so complicated we can’t secure them, nobody understands them nor wants them.”

On the streets of Asnières, residents struggle to understand the numbers behind the subprime crisis. But there’s one thing they do see — an increase in local taxes by 17 percent. 

“It’s worrying, because we know we have to pay off our debt, but at the same time, that means less money to build schools and daycare centers," retail consultant Anne Lucchini said.

The first things to go: restoring the town’s elegant Asnières castle and building a community gymnasium.

Local officials fear that worse is to come. Some of their loans have yet to enter their most dangerous phase. In October, interest rates on some assets will become variable and could easily reach two-digit figures.

To buy back its loans, the town would have to increase local taxes by 66 percent — something the current mayor refuses to do. Ultimately, if the town council isn’t capable of balancing its books, the state would have to step in.

In the meantime, local officials are in talks to push back repayment deadlines.

An audit company hired by the town council estimates that Asnières will not be able to secure bank loans in the forseeable future. With the crisis hitting families in Asnières, the town needs to spend more on benefits — an increase that is stretching local finances further.

“It’s like walking around with a bomb and always delaying the day it will be set off,” 

Pietrasanta said. “But we know it will eventually explode.”

Pietrasanta hopes that the government and lawmakers will find a way out of the debt crisis. The French National Assembly is currently examining a bill that could pave a way towards renegotiating toxic loans at a national level.

The credit crunch is also hitting other actors: regional authorities, hospitals, water and electricity companies who used to take out loans with Dexia.

French daily Le Monde reports that many towns, like Asnières, are postponing investments and construction work. The Nord-Pas-de-Calais region has reportedly brought seven large hospital building sites to a standstill.  

But with growth dipping in France, the credit crunch could tip France into a recession and destroy jobs.

In the last quarter of 2011, France narrowly avoided slipping into a recession.

A group representing public-works firms, FNTP, reports that over 8 percent of firms working in public works have gone bust over the past year. Ten thousand jobs are at risk in the coming months.

But there may be hope.

This month, France and Belgium reached an agreement on dismantling Dexia. Its toxic assets, estimated to amount to as much as $254 billion are being bundled into a “bad bank,” according to a Bloombergestimation.  

Dexia Credit Local, state financial house Caisse des Depots and the French government will each take a 31.7 percent stake in the new bank while La Banque Postale, the banking arm of the French post office, will take a 4.9 percent stake.

But the new state-backed bank, known as Dexma, is not expected to be operational before June. In the meantime, local representatives want the French government to step in.

“I’m not convinced the new bank will be enough,” said Philippe Laurent, head of the finance committee of the AMF a group representing French mayors. “It will take quite some time before the bank is operational, and there will be problems if it doesn’t start lending by September.”

“We also don’t know how many loans it will be allowed to give out.”

On Monday, the French Banking Federation announced several banks including BNP Paribas and Societe Generale have agreed to lend $12 billion to towns this year.

This is a welcome move that might help reduce the credit crunch, though it is unclear yet if towns can expect satisfactory loan terms.  

As a stop-gap measure, the government also announced last week it was earmarking $2.6 to $6.5 billion in loans to local governments.

But it appears French President Nicolas Sarkozy is reluctantly coming to the rescue. In a recent interview with the French daily Le Figaro, Sarkozy called on local authorities to cut spending in line with state and social-security budget reduction.

Laurent says the government is “playing with fire,” by ordering towns to cut spending at a time when the country needs growth. 

In Asnières, Pietrasanta has yet to be convinced the new municipal lender Dexma will change things for the better.

Instead of waiting around, his town has adopted a more proactive stance: It is suing Dexia for misleading advertising and deceptive marketing practices.