Lending to local and regional governments should feel
simpler and safer thanks to the reassuring presence of sovereign
states in the background. Instead the role of the centre often adds
a new layer of complexity. A pretty clear legal framework of
responsibilities may exist in Germany. But elsewhere it is often
not cut and dried whether a country should, either legally or
morally, avert the default of a particular town or region. In the
end it's as much a matter of politics as finance.
There are in-built tensions between the centre and the regions.
"It is a balancing act," says Janne Thomsen, senior vice president,
European co-ordinator for international sub-sovereign group at
Moody's Investor Services in London. "The central government wants
to decentralize so that it can cut costs but local governments have
to have sufficient funds to carry out their tasks. People need
certain services but the central government has to decide...
