A Franco-Belgian bank operating in Japan is offering longer term loans to municipalities that are trying to get rid of heavy debts that are threatening to bankrupt many of them.
Paris-based Dexia Credit Local, under the umbrella of Dexia S.A. headquartered in Brussels, started business at its Tokyo branch last December and has since extended about 150 billion yen in loans to 37 municipalities and prefectures. It is filling a demand created by the growing threat of bankruptcy — Yubari in Hokkaido has already filed — and the central government’s moves to decentralize.
The European bank has been helping municipal governments that have to raise more funds by themselves due to cuts in subsidies and grants from the central government.
Robert Verdier, chief executive officer at the bank’s Tokyo branch, said Dexia decided to enter the Japanese market because municipalities will have more control over their public finances with reforms from the previous prime minister, Junichiro Koizumi.
“The Japanese local debt market represents 42 percent of the global market, and it is natural for us to start operations in Japan. We began preparing for the launch of business around 2004, when the ‘trinity’ reforms took shape,” the 47-year-old CEO said, speaking in Japanese.
The so-called trinity reforms refers to a three-pronged plan of attack to cut state subsidies and tax grants to local governments and instead transfer them tax revenue sources. Koizumi spearheaded the plan as part of his bigger program to decentralize government.
At the end of fiscal 2006 in March, the Finance Ministry estimated the outstanding balance of long-term debts held by municipalities to be 201 trillion yen, or about 39.4 percent of the country’s gross domestic product.
Verdier said local governments will have more responsibility for their finances once changes are made to the Bankruptcy Law to clarify how local governments can file for bankruptcy and give procedures for their revitalization.
Heizo Takenaka, the key architect of Koizumi’s economic reforms as his minister of internal affairs and communications, presented a proposal for amendments to the law.
Verdier said the bank, which specializes in public finance, can help local governments here reduce their debts as they have global experience in turning around troubled municipalities.
Dexia, which has a market share of about 15 percent in Europe and 24 percent in the United States, has been involved in revitalizing Orange County in California, which went bankrupt in 1994. The banking group operates in 26 countries.
“It is difficult to sell off municipalities’ assets because it could adversely affect citizens’ daily lives. But we can suggest asset mobilization measures, such as concession,” Verdier said.
Under concession, which has been widely used in France, the public sector keeps the right to hold certain assets but sells the operational rights to the private sector.
Verdier has looked at the situation in Yubari, the once-prosperous coal-mining town that recently declared bankruptcy.
“Yubari failed because it has too much equipment. The area has a population of about 13,000, but the city has skiing grounds, hot springs, museums and an amusement park,” he said.
Verdier said it was too risky for Dexia to give Yubari a loan. He also warned that there were other municipalities that could end up like Yubari.
When the bank opened in Tokyo, the head of the branch visited all 47 prefectures and 64 regional banks to explain Dexia’s services and to discuss possible tieups with local financial institutions.
“We aim to have transactions with every Japanese city with a population of more than 80,000 in 2008. There are about 350 such cities, and we cannot do this without the cooperation of regional banks,” the CEO said.
Dexia’s Tokyo office has 40 employees, eight of whom deal with clients, he said.
Verdier said Dexia “will do what regional banks do not want to do,” referring to the fact that the European bank will offer local governments superlong-term loans, longer than the 10-year loans extended by Japanese regional banks.
Dexia has been rated AAA by major credit-rating agencies and can extend longer-term loans as it has been able to raise a lot of funds due to its strong financial credibility. Regional banks rely on deposits with shorter maturity, Dexia officials said.
Dexia already has teamed up with Bank of Kyoto to give the city of Kyoto 10 billion yen over 20 years in a “term-sliced” loan, which brings together a 10-year, 2 billion yen loan from Bank of Kyoto and a 20-year, 8 billion yen loan from Dexia.
After a three-year grace period, Kyoto will begin paying off the loan to the two banks, Dexia officials said, adding it is Dexia’s first joint financing effort in Japan.
Verdier said the regional bank system, in which there is at least one bank in each prefecture, is “very unique.” The local banks have large market shares in their areas, despite competing with the national banks.
Dexia also is considering offering loans to the regional banks, according to Verdier.
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