Market turmoil will not affect French local, regional ratings

French regional and local governments (RLGs), which already face higher interest payments, will now also have to contend with banks restricting their financing to the sector as a result of worsening market conditions. Thanks to the sound financial and debt indicators posted by the RLGs, as well as France's recent initiative to facilitate access to credit, there is limited risk of a sudden generalised deterioration of the RLGs' finances in the context of the current market turmoil, Moody's Investors Service said in a new special comment.
"Most French RLGs are entirely dependent on bank financing, which makes them sensitive to the banks' refinancing terms," explained Sebastien Hay, Vice President — Senior Credit Officer in Moody's International Public Finance group.
The current legal framework discourages large cash holdings as RLGs are required to limit their cash in non-interest-bearing accounts with the state treasury. "Thus, Moody's believes the restriction of credit — if it were to last — could pose serious challenges to local governments, particularly those that are of modest size and have limited budgetary room for manoeuvre," cautioned Hay.
To help overcome this latest challenge, France recently asked its financial arm to provide EUR2.5 bln in loans to RLGs, with an additional EUR 2.5 bln provided by other banks. "Moody's views this initiative favourably as the cash will provide much-needed relief, representing approximately a quarter of the RLGs' borrowing needs in 2008," said Hay.
Going forward, French RLGs will likely face lower revenue growth due to the slow evolution in state grants and a steady decline in proceeds from property transactions. "However, while these factors will pose constraints on the RLGs in 2009, Moody's believes that the overall financial and debt indicators, currently at sound levels, provide the RLGs with some room for manoeuvre and help them navigate a challenging economic environment, as well as enable them to maintain their position against their international peers in the same rating category," Hay concluded.
The French RLG system encompasses more than 39,000 entities. Moody's currently rates 10 French RLGs: City of Paris; Ile-de-France region; Rhone-Alpes region; City of Villeurbanne; Departement of La Manche; City of Lyon; City of Saint Mande; Region of Champagne-Ardenne; Inter-municipality of Cergy-Pontoise; and City of Clichy-sous-Bois.