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. 

Bank runs in Europe

Back-Door Bank Runs in Europe Have Started

WRITTEN BY BOB ADELMANN   

the New American.

10 December, 2011

In his interview at King World News, James Turk, founder of GoldMoney and author of The Coming Collapse of the Dollar, noted in his travels around Europe that “there is one common trait, regardless of which country I am in: people are really frightened about the possibility of the collapse of the euro. Money continues to move out of the European banking system, which explains why central banks stepped in with some money printing last week.”

He then went on to explain that there are only three sources of funding available to a bank: its customers lending it capital through checking and savings accounts, the issuing of long-term bonds which it sells to bond investors, and short-term financing provided mostly through money market funds. If any of these sources dries up, it puts the bank almost immediately into a precarious financial position. He said that the day before the world’s central banks stepped in to make short-term money more available was “frightening:”

Even though I’ve been saying this has been coming, last week was truly frightening with the banking system about to fall into the abyss. Had the central banks not stepped in it would have been a Lehman moment.

Sadly, they haven’t solved the problem. They have bought time and whether that time is one or two weeks or maybe a month, we will soon find out.

Belgium’s largest bank, Dexia, with some 35,000 employees and nearly $25 billion of “core shareholders’ equity” at the end of last year appeared to have recovered from its near-death experience in 2008 when it required a $10 billion bailout. On July 15, 2011 the European Banking Authority applied a “stress test” to the bank’s finances, and it passed with flying colors. The authority reported that its safest asset — Tier 1 Capital — was 12.1 percent, and would fall to 10.4 percent only under the test’s “adverse scenario,” making it one of Europe’s safest banks.

On October 10 the bank failed, and had to be purchased by the Belgian government.

Dexia was the trigger event that started the run on the European banks. Paul Krugman of the New York Times answered a hypothetical question in his column on November 1:

"The question I’m trying to answer right now is how the final act will be played. At this point I’d guess soaring rates on Italian debt leading to a gigantic bank run.... This then leads to emergency bank closing(s)…"

On November 21, the Fixed Income Research Unit of Credit Suisse had this to say:

"We seem to have entered the last days of the euro as we currently know it.... Some extraordinary things will almost certainly need to happen … to prevent the progressive closure of all the euro zone sovereign bond markets, potentially accompanied by escalating runs on even the strongest banks".

David Rosenberg, senior economist and strategist at Gluskin Sheff, wrote that same day that “banks are shedding their assets. Investors are increasingly reluctant to lend to either sovereigns or financial institutions.... Lenders are finding it difficult to finance their day-to-day operations with short-term funding. This is a lot like 2008…”

Two days later, The Economist wrote that a back-door run on European banks had begun in earnest. This is not the typical visible bank run with depositors lined up at the front doors waiting to withdraw their funds. Instead, as The Economist noted, “billions of euros are flooding out of Europe’s banking system through [the back door of] bond and money markets.” It started just after Dexia failed. In the third quarter bonds issued by European banks were just 15 percent of the amount they sold over the same period in the last two years.

Short-term financing started drying up too. American money market fund managers became aware of the increasing risks and began pulling their investors’ money out. According to The Economist, those funds have pulled almost two-thirds of their money out of French banks, and more than 40 percent of their funds from all European banks. Interbank borrowing costs are reflecting the increasing need for day-to-day funds as three-month rates are now the highest since 2009.

An analyst for Citi Group wrote that corporations also have started withdrawing excess balances from banks in Spain, Italy, France, and Belgium. This is forcing banks to begin to act like pawn brokers, putting up real assets as collateral for loans. The president of UniCredit, an Italian bank, for instance, has asked the European Central Bank to broaden its range of “acceptable assets” against which it will lend. And an increasing number of banks are now engaging in “liquidity swaps” where banks borrow an asset that the ECB will accept as collateral in exchange for one that it won’t accept, and paying a hefty premium for the privilege.

Banks are reducing their lending to finance trade and fund aircraft leases as well in order to preserve cash. But that only slows down the bleeding and buys the banks precious little time.

The blogger at the Economic Collapse Blog has confirmed that the back-door runs on European banks have begun:

Right now we are seeing the beginning of a credit crunch that is shaping up to be very reminiscent of what we saw back in 2008. Investors and big corporations are pulling huge amounts of money out of European banks.... Nobody wants to lend to these banks. We could potentially see dozens of “Lehman Brothers moments” in Europe…

All of which is entirely predictable. The banks loaned money to credit-challenged sovereign states, hoping that at least they would be able to service the debt by making interest payments. Now, as credit is drying up and interest rates are soaring, the European economies are slowing down. This so-called “death spiral” can only end badly with the back door runs continuing until bank failures ultimately stop the bleeding.

Citizens panic - long queues at the ATMs of Swedbank

On Sunday evening a number of Swedbank ATMs throughout the Latvian formed long queues.

Diena, 

11 December, 2011

Already reported that social networks Sunday afternoon activation of profiles, which circulated rumors about Swedbank bankruptcy. Swedbank and dismissed any rumors and stated that ATMs are working as usual and the bank's "mother country" no problems in the banking operation failed.

Update: Latvians drain ATMs, banks refute rumours

* Rumours of Swedish banks' woes unfounded - authorities

* Some ATMs run out of cash, banks restocking

Reuters, 

11 December, 2011

Worried Latvians drained ATMs of cash on Sunday despite assurances from regulators and bankers that rumours about a problem with Swedbank and other Swedish banks operating in that Baltic nation were false.

Swedbank and SEB dominate banking in the country where medium size bank Krajbanka went bust earlier this month and which has a history of post-Soviet bank failures.

Swedbank and SEB both said they had seen increased withdrawals on Sunday after rumours spread on Twitter of problems at Swedish banks. People also reported getting phone calls from relatives and friends about rumours of bank problems.

"These are totally irrelevant rumours coming out of social media. The bank's position is more than solid," Swedbank spokesman Thomas Backteman, said. "The rumours are not only about us, but about Swedish banks."

Swedbank Latvia chief Maris Mancinskis wrote in a note to clients on the bank's Website that the rumours were "lies," but said activity had been heavier than usual for a Sunday evening. "If a cash machine becomes empty then it will be refilled within a couple of hours," he added.

SEB said that out of 234 ATMs, about 10-15 percent were without money at one point, but the bank continued to restock bank machines.

In many parts outside the Latvian capital Riga and other regional towns, long queues formed at cash machines, local media said. In Riga town centre the queues were short.

One man, standing in a queue at a Swedbank ATM in central Riga, said he had heard a report the bank was about to go bust. He declined to give his name. A woman, who also declined to be identified, said her son had called her and told her to get her money out of the bank, but that she didn't know anything more.

Latvia's financial services authority said the rumours were unfounded.

"A groundless wave of rumours has spread this weekend on Internet media and social Websites about the financial situation of Swedbank," Latvian regulator FKTK said in a statement.

"The Commission (FKTK) would like to inform the public that these are only rumours and there is no need for worry about the financial situation of the bank," it added.

The BNS news service quoted Security Police spokeswoman Kristine Apse-Krumina saying that the law enforcement authorities have been alerted to the rumors and increased cash withdrawals from ATMs.

"At this point, the rumors have no logical grounds," she said. Spreading false rumours about the banking system is a criminal offence.

Backteman said that at Swedbank - one of the best capitalised banks in Europe - withdrawals were running at about three times normal for a Sunday.

Swedbank had core capital of 13.35 percent of risk-weighted assets at the end of September, according to stress tests conducted by the European Banking Authority. It has set the minimum capital level for banks at 9 percent of risk-weighted assets.

Backteman said rumours of Swedish banks having problems had started about two weeks ago, and resurfaced on Friday.

He said Swedbank, which has has deposits of 1.6 billion lats ($3.10 billion) in Latvia, was monitoring the situation and was making sure customers were able to withdraw their money from the bank if they so wished.

The rumours come weeks after Latvijas Krajbanka collapsed following the takeover of its parent in Lithuania by the government, amid allegations of fraud against the former owners.

The collapse in 2008 of Latvia's second-biggest lender, Parex bank, forced the country to take a bailout from the International Monetary Fund and European Union.