S&P: European local government borrowing to start rising again

15 Feb 16

The fall in local and regional government (LRG) borrowing across Europe is likely to end in 2016 as the growing refinancing needs of some offsets declines elsewhere, according to analysis by credit ratings agency Standard & Poor’s.



The agency found that, while consolidation was ongoing in countries like Germany and Spain, this was counterbalanced by expanding refinancing needs elsewhere, including Sweden, France and Russia. The effect would be to stabilise LRG borrowing in 2016/17 after a drop of almost 20% since 2012.

The overall combined debt stock of Europe’s LRGs will therefore continue to rise by 2% annually and exceed €1.9bn by the end of 2017, according to the analysis.

“We anticipate the ongoing geographical diversification of European LRF borrowing. German and Spanish LRGs are likely to decrease their presence in the debt market, with Swiss, Swedish, French, Russian and Norwegian LRGs filling the void,” S&P’s report said.

In 2015, German and Spanish LRGs made up the largest proportion of LRG borrowing. However, their share is expected to decline from 60% in 2014 to 52% in 2017. Italian LRG borrowing is also set to significantly decline as tighter limits on municipal borrowing are imposed by central government.

At the same time, larger deficits will boost borrowing in France and Russia, while Swiss LRGs are likely to increase their borrowing in euros because of Swiss franc appreciation. Swedish and Norwegian LRGS will also face higher refinancing and larger deficits.

S&P also said bonds would make up 37.5% of new borrowing in 2016-17.

“We believe that the European Central Bank’s recent decision to include euro LRG bonds into its public sector purchase programme could raise the appetite for bond placements across the eurozone, especially in Germany, France and Spain,” it added.

German states already dominate the European LRG bond markets, accounting for around 60% of the continent’s issuance, followed by Swedish and Norwegian LRGs. Bond finance is on the rise as a form of funding is in countries like France and the UK. 

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