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Capital Markets

Europe’s regional governments hunt for efficient funding

Municipal and regional governments are trying to build new investor bases in the teeth of the eurozone crisis. And they’re having success, not least in the Nordic region, which could provide a template for other parts of Europe.

Think about two cities at opposite sides of the globe, which apparently have little in common, economically or culturally. What Tokyo and Madrid do share, though, is that both are bidding to host the Olympic Games in 2020: one of many reasons why neither of their governments would allow them to get into serious financial bother. Their funding costs relative to their respective governments, however, could scarcely be more different.

Tokyo metropolitan government’s 10-year bonds trade at about 1.5 basis points over Japanese government bonds. There are plenty of technical reasons explaining this razor-thin spread.

But talk to funding officials at TMG and they’ll tell you that this small spread is fully warranted on a fundamental basis as well: if anything, Tokyo is a better credit than Japan. After all, it accounts for 0.6% of the country’s land mass, but for 20% of its economy, and has a much lower debt-to-GDP ratio than the sovereign.

The region of Madrid could mount an equally persuasive argument about the strength of its credit story compared with Spain’s. As Fitch notes in its most recent analysis, a number of indicators highlight Madrid’s prosperity relative to the rest of the country’s.

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