On the Perils of Structured Loans Financing in France and Italy

Abstract

The restructuring process of sovereign debt is not yet managed under common global rules; public debt stabilisation is an explicit policy goal in the EU, but cannot be achieved if local public authorities do not control their liabilities and connected risks. EU local administrations’ debt soared due to the economic downturn, reduced resources transferred from the central state and increasing expenses. After 2000, French and Italian local authorities extensively underwrote complex financial instruments, such as over the counter (OTC) interest rate and exchange rate derivatives and structured loans (i.e. loans with embedded derivatives) to manage their growing liabilities; the proliferation of derivatives among European public administrations has been favoured by the absence of proper disclosure and of monitoring procedures. Losses due to structured loans accumulated and in 2017 French local authorities asked for state rescue; similarly, some Italian regions and municipalities reported relevant losses. The reduction of financial risks can be achieved by improving information and transparency, by reducing moral hazard, and limiting ‘revolving doors’.

The use of swaps by local administrations: the case of Italian regions, 2007–2014

“…Luby and Singla 2014 (Oldani, 2019). Indeed, local administrations in both countries enjoyed little control and supervision.…”

“…As a result, in 2015, 676 local French administrations asked for state rescue because they were unable to repay their loans, especially those indexed to the Swiss Franc exchange rate (which had implicit rates varying from 12.5% to 81%), with losses worth €2 billion (Cour des Comptes, 2018). Italian and French local administrations extensively used swaps, and similarities between these two countries were relevant (Oldani, 2019). Indeed, local administrations in both countries enjoyed little control and supervision.…”