Finance crisis sparks confusion on municipal credit market

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Banks in Finland have closed credit taps to local authorities because of the ongoing financial crisis. At the same time they have sought to get rid of loans previously granted to local authorities by offering them to Municipality Finance.
      As a company owned by Finnish municipalities, Municipality Finance is able to offer local authorities money at a lower interest rate than banks can.
      Municipality Finance CEO Pekka Averio says that loans have been offered by both Finnish banks as well as other European municipal finance institutions.
      Foreign municipal finance companies that have operated in Finland include Depfa and Dexia, the latter of which has been taken into the rescue programme of France, Belgium, and Luxembourg. Depfa, for its part, is getting artificial respiration from its German mother bank.
      Municipalities and federations of municipalities had a total of about EUR 9 billion in debt last year.
     
The first to sell its municipal loans to Municipality Finance in the past week was Nordea, which sold EUR 600 million in municipal debt.
      Averio says that Municipality Finance is not currently interested in taking on more municipal loans, because of uncertainty in how the accumulation of money will develop in the coming years.
     
The financial crisis has also sparked a cutthroat battle within the municipal sector itself. The Local Government Pensions Institution (KEVA) has granted local authorities loans with a zero interest rate margin. This has made KEVA and Municipality Finance each other’s worst competitors. KEVA owns about 40 per cent of Municipality Finance, and the second-largest owner, the City of Helsinki, has a holding of about 11 per cent.
      KEVA lends municipalities pension contributions, which they have collected themselves, making it the overwhelmingly cheapest lender. The purpose of KEVA is to invest the pension funds of local authorities as profitably as possible.
     
Pekka Averio of Municipality Finance says that KEVA has an overwhelming competitive edge. Municipality Finance has had to raise its own margins in order to prepare for a deteriorating market situation.
      A year and a half ago KEVA had about one per cent of municipal loans, but in recent days, the figure has risen to 25%.
      KEVA deputy CEO Timo Viherkenttä told Helsingin Sanomat on Wednesday that the finance crisis has brought more customers to KEVA.
      Heikki Niemeläinen, deputy CEO of the Municipal Guarantee Board, which guarantees the revenue acquisition of Municipality Finance, says that he fears that municipal borrowing may get out of control.
      “If some player in the municipal field sells credits to local authorities below the market value, it will push prices down heavily. As a result, private foreign and domestic players have already withdrawn from the market.”
     
KEVA CEO Markku Kauppinen sees his institution’s lending as a natural lending back of sorts, although the law does not see it that way. The market situation of recent days has persuaded KEVA to drop its zero margin policy, Kauppinen says.
      “Whey shouldn’t we lend to municipalities, that is, to our own membership communities, since we lend to the European public sector? We have no interest or no pull to become the market leaders in the municipal credit business, but we are one competitor.”


Links:
  Municipality Finance
  Local Government Pensions Institution

Helsingin Sanomat