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Sub-sovereign debt in Europe

July 1, 2014

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In Europe, there are stark differences in the importance of bonds for regional and local governments. The German Laender and local governments finance 47% of their operations via the capital market, while the share of bonds in the total debt of regional units in France comes to only 6% and in the United Kingdom to only 5%. In Spain, the share of bonds in sub-sovereign debt in 2013 came to 24%, compared to 20% in Italy. With the exception of Germany, loans from banks or the central government make up the largest share of sub-sovereign debt by far.

The issuance of bonds entails fixed costs which are worthwhile only above a certain volume. Furthermore, the ratings of the respective local or regional government, the institutional framework of the country and the size of the region have an important influence on borrowing costs. One advantage of capital market financing is access to a wide circle of potential investors. Smaller units may team up to place larger volumes in the capital market. For this purpose, a municipal financial agency was set up in France last year that was partly modelled on its existing counterpart in Sweden.

Given Germany's AAA rating, fiscal compensation via the Laender fiscal equalisation scheme and relatively comprehensive tax and expenditure autonomy, even economically weaker Laender can have cheap recourse – by international standards – to capital markets. The situation in Spain looked completely different over the last few years as many regions had at times almost completely lost access to capital markets. After the Spanish government established a regional rescue fund and was able to push through reforms to balance regional budgets, the debt costs of the regions declined markedly. As far as new issues in 2014 are concerned, quite a few regions have had to offer rates that are only marginally higher than those for the Spanish central government.

While Italy's regions have not brought any sizeable new issues to the market since 2007, new sub-sovereign issue volume for Germany, France, Spain and the United Kingdom will probably be the same or higher in the next few years.






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