Financial crisis. Towards a rise in local taxes?
One of the unintended consequences of the current financial crisis will likely be the rise in local taxes. Cities and departments have resorted in recent years to index-linked loans or exchange rates that the stock market storm is heckling dangerously.
It is an open secret among the experts: a number of French local authorities have played with fire in recent years, underwriting high risk loans. Consisted at very advantageous rates, these so-called "structured" financial products have only one flaw. They are indexed on stock market indicators or currency exchange rates, according to complex formulas that only specialists master all the subtleties (1). And again ... Many bankers, in good faith, have presented as almost impossible evolutions that the current financial storm makes very likely. For the great misfortune of a number of municipalities or departments, which are likely to see their repayments fly.
The problem will not be inconsequential on local taxes. The structured products would indeed represent 25% of the total of the indebtedness of the collectivities (which was 137 billions of euros end 2007), with peaks to 50% for some cities! The situation of the latter is potentially explosive. This does not necessarily appear in their budgets, because structured products are often presented as conventional loans. It is not written that their rate is likely to fly one day depending on eg the exchange rate yen / euro, or even the interbank rate Polish day to day ...
Real speculations
Leaving aside the convolutions of language rigorous between financial, the rating firm Fitch Ratings has set foot in the flat in July 2008, in a note with the explicit title: "The structured debt of local authorities: active management or speculation? "
The study finds that cities, facing initial difficulties from the August 2007 crisis, have preferred to negotiate with their bank even more risky borrowings, simply to win 2 or 3 years before an increase in their maturities even more. considerable!
Comparing some communities to "pilots who would navigate without instruments," Fitch Ratings denounced "a real leap forward that could quickly be very dangerous."
"Do not generalize, says David Diano, director of Fitch Ratings International Public Finance Department. Large cities, departments and regions are usually run by competent officials who have been cautious. "
This is not always the case in medium-sized cities. Without naming, the firm cites the uplifting example of a community having "negotiated" a loan at 3,18% that could rise to ... 31% if the dollar went down in the next 10 0,5 2006. We are far from it, certainly. But who would have bet in 2 that the price of a barrel of oil would double in XNUMX years?
tax burden
Local governments on the verge of insolvency will probably have to increase the tax burden. They can not increase their indebtedness, and they will have to assume larger repayments than expected for outstanding loans. To make matters worse, because of the very pronounced slowdown in the real estate market, they will see drying up the resource of the transfer duties for valuable consideration. These represent 5% of the selling price of a good, shared between the departments (3,6%), the municipalities (1,2%) and the State (0,2%). These transfer fees have gone from 3,74 billion euros for 2000 homes to more than 11 billion in 2007, but they will inevitably fall this year and probably fall again next year. Even the city of Paris, whose financial situation is otherwise deemed healthy, confirmed in early October an increase of 9% local taxes in 2009, to offset the depression of real estate. This points to strong increases in taxation, in municipalities that will cumulate lower transfer duties and explosion of the time bomb of structured products!
Erwan Seznec
1. Of the "3,18% interest" type if the EUR-USD rate is lower than 1,44, and 3,18% + (100% - 1,44 / EUR-USD) otherwise.
Source: UFC Que Choisir