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Local Authorities Face Credit Crunch Amid European Debt Crisis

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• $3bn withdrawn from US municipal-bond market in a week

Cities and regions are finding it difficult to raise money on the financial markets as the anxiety about Ireland's plight deters investors from buying bonds from other would-be borrowers. The debt-laden state of California had been forced to raise rates to 1.5% and 1.75% to attract investors to a $10bn (£6.25bn) sale of securities. Spain's finance minister, Elena Salgado, refused to allow Madrid's municipal authority to refinance some of the city's staggering €7bn of debt.

Philip Brown, managing director of capital markets origination at Citigroup, said: "For everybody in Europe, the discussions going on in Ireland are extremely important and the outcome of those will determine interest rates in Ireland and other countries. These discussions will set the tone for investors' appetite for peripheral countries."

Credit markets shut after the collapse of Lehman Brothers two years ago have opened again but only to the most solvent and highly rated companies or countries.

The impact can been seen in the US market where cities raise funds through what is known as the municipal bond market. As much as $3bn of withdrawals of investor funds took place in the US municipal bond market in the week to 17 November, making it the worst week for "munis" in 19 years, according to Bloomberg.

Guy Benstead, a partner at Cedar Ridge Partners in San Francisco, said: "Public issuers are challenged; it's tough, tax receipts are down, revenues are down, local authorities are struggling, that makes the market very sensitive."

In Europe, cities and regions are also struggling, except in Germany, whose decentralised and disciplined self-financing Länder model is not being punished by investors. German states such as North Rhine-Westphalia can still charge only about 0.3% above the rock-solid German bond rate, at about 3%.

The Spanish region of Catalonia has been forced to pay as much as 4.75%.

Andrés Rodríguez-Pose, professor of economic geography at the London School of Economics, said: "Spanish cities' and regions' debt is too big, unjustified by their capacity to generate income. Many cities won't be able to meet payments. There's no solution; the situation will break down, borrowers won't pay or the national government will have to assume that debt."

For a Prof he's not very bright is he default is the solution, bankruptcy is the only option. It's looking more and more like the debt has reached the tipping point it's been allowed to increase to such a large level it's no longer serviceable and now it's becoming completely obvious to everyone no one can pay.

Tax revenues down and still we don't see people moving towards spending what they can afford, however the big problem is debt servicing costs cannot be reduced unless you default.

Extend and pretend.

I love how they think if they sweep Ireland under the carpet all of these problems will somehow disappear.

The problem is debt. The debt mountain has not gone away, the problem has not been tackled with either default or repayment, just the creation of ever more debt. This path is not sustainable.

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Its easier said than done to pay down debt across the society, when the means of exchange is also based on the amount of debt in existence. If much debt gets paid down across the society it will get harder and harder to pay the remaining debt.

Hence the need to print money to make up for the means of exchange, as the debt deleveraging goes on. If you look at the charts the deleveraging is under way. But at this rate it could take 10-15 years to complete.

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I fully agree with the fact that local authorities should only spend what they can raise from local taxation.

Infrastructure improvements should be paid for out of slightly increased rates on properties and businesses.

At the moment authorities borrow from central government for infrastrucutre improvements and then pay them back. This means that the borrowing costs are very low and no fees have to be paid to the financial industry.

Still Eric Pickles doesn't like getting stuff for low fees when the financial industry can lodge itself into the transaction so now councils are to be given the "freedom" to borrow from the financial markets instead, paying a higher rate of industry and giving millions in fees to the city as well.

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  • 434 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?

      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%

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