Go ask the Spanish Ritchie

French region Provence-Alpes-Côte d’Azur has issued a 12 year, AA-rated, €119.5m “socially responsible” bond with 75% of proceeds going to environmental projects (renewable energy, energy efficiency, transport) and 25% to social housing. The bond was significantly over-subscribed. Coupon is 3.6%; joint bookrunners were Crédit Agricole CIB (bravo Tanguy Claquin!) and HSBC France. Insurance companies made up 58% of investors, followed by asset managers at 33%. A third French, almost a third German, and the rest divided between Belgian and Dutch.

Now why can’t we do that too?

I’ve long been an advocate of local bonds for such purpose here in the UK and it’s a core part of the Green New Deal.

A good reason why we don\’t do that, not why we can\’t, is to take a look at the Spanish regions and municipalities. They\’ve just gone through an orgy of such borrowing for an orgy of such investments.

And it has all come to tears, hasn\’t it?

The problem being the political incentives at play. Those in power can borrow to buy votes, the debts coming due long after the end of their political careers.

Allowing such borrowing direct from the markets just increases this temptation.

Now, if Mr. Murphy would like to detail the control structure that would be in place, to make sure that, as just one example, we don\’t end up with a new commercial airport which has not seen one single flight (as in Valencia) then perhas we might take this idea more seriously.

And it isn\’t a purely Spanish problem either. Something not dissimilar, excessive local authority borrowing, went on in Liverpool in Militant days.

By the way, \”the right politicians\” is not a control structure. Quite apart from the incentives being the same for all such scumbags a democratic system does mean that at least occasionally the \”wrong\” politicians will get in.

16 thoughts on “Go ask the Spanish Ritchie”

  1. Not that dissimilar to what happens in Scotland. Fair enough, Scotland can’t borrow by itself (yet) but the barnett formula cheque that Edinburgh gets from Westminster every year, without any financial accountability, gets spent on populist policies like free prescriptions, free healthcare for the elderly, free tuition, free anything that anyone has ever charged for.
    That’s why devolution is ultimately unsustainable – and it doesn’t matter which political party is in power.

  2. I suggest that politicians should be personally liable for any debt that they run up, i.e. their pension pots should be used as security.

  3. Clearly this same argument must apply equally well to the national budget as well. So Timmie, you want a world with no medium/ long term govt debt at all? Not your finest hour.

  4. Rahul

    Regional government debt is particularly problematic because of the implicit national backstop/guarantee. This need not be the case if national governments are sufficiently tough, but in many countries this has not proven to be the case.

    By giving the regional authorities someone else to blame/blackmail it muddies the political waters and also persuades many banks/markets to lend more than would be strictly sensible to profligate regional governments.

    As noted at other times here, it would be sensible for governments to run large surpluses in good times so that they can act counter cyclically in bad times, and that while allowing a government to have a substantial stock of government debt (for income smoothing and also for the provision of a risk free financial instrument) is sensible, keeping it low would probably be good for long run growth (define “low” being the problem).

  5. @Rahul: And when national gov’ts (say Grece to pick a purely random example) have a similar supranational guarantor…

  6. Spain could be a bit more screwed up than even that. The word from the regions is that the national government has tried to park some of its debt in their accounts, so it isn’t just the regions’ orgy of borrowing.

  7. ukliberty

    I believe it’s the usual problem of unfunded (or underfunded) mandates. The central government mandates a certain level of spending on something but fails to provide full financial resources for this (but with significant penalties – usually monetary) if local government fails to provide. Local government has to raise funding (or borrow).

  8. If relatively expensive borrowing by means of PFI schemes is a bad idea (and it is), then why is relatively expensive borrowing by regional authorities a good idea? (Provence?Alpes?Côte d’Azur is paying 80bp over French government rates.)

    And are HSBC the good guys now?

  9. Tim

    I’d have to partially agree with Ritchie here, (and I’ll explain why) – Why can’t the Regions raise debt? On the proviso that noone bales them out and that the consequences of such failure and profligacy are starkly brought home when the promises made can’t be funded?

    What people need to realise is the old adage that there is no such thing as a free lunch. (Even people like Arnald, who is clearly out to lunch, metaphorically speaking) If we allowed Local authorities to raise money from the market, we’d have to make it clear to the electorates of Hard Left Labour/Green councils, especially that you can raise this money in this fashion, but on no account will the Central government bale you out – it’s about clear lines of accountability, and has not been tried in the UK for centuries, if at all.

    I’d advocate allowing it if only for the implementation of such a policy to illustrate why many Local (or indeed many National) politicians can’t be trusted to be accountable and as a result the entire edifice upon which the ‘Courageous State’ is constructed falls down around the Downham Market Man’s ears…

  10. but on no account will the Central government bale you out

    And that just ain’t gonna happen.

    The first sign of a failing local authority and the usual suspects will be screaming postcode lottery and won’t someone think of the children.

    National politicians, not wanting to be seen as heartless, especially in the run up to an election and in marginal constituencies, will have to do something, and we know what that leads to. Furthermore, well get the “..they bailed out the banks..” arguments as well.

  11. It’s interesting to consider the other half of the equation – not the electorate, but the bond buyers. If they think the French bond is a sure thing, then the price is rather high. Rather, it seems to reflect some risk of default.

    If regional government _will not_ be bailed out under any circumstances – the bondholders will take a loss if their debtors can’t pay – then those purchasing debt will correctly price-in the risk.

  12. 14/

    @ SimonF – Oh, I agree it’s never going to happen, in Spain or in the UK – for the reasons you so eloquently outline, and Tim’s point is that Crap politicians can be the result of a democratic system, which I why I suspect that Murphy’s commitment is to the kind of ‘democratic’ elections seen in (for example) the German ‘Democratic’ Republic between 1949 and 1989….

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