It also gave them more power management on budgets growing

One of the first victims of the "subprime" crisis was the regional German bank IKB of Düsseldorf, in the summer 2007. This Bank had, against all odds, speculated on the US housing market. This example shows that the financial crisis can affect economic actors that would be, prima facie, supposedly very little exposure to financial risk. Unfortunately, it is not impossible that some French local communities are among the next victims indirect and unexpected of the aberrations of Wall Street and the City.

Decentralization has increased the powers of local authorities (municipalities, departments and regions) in the field of education, health, learning and aid to companies. It also gave them more power management on budgets growing. The budgets of the regions thus increased by an average of 9.8 per year since 2003. But often, financial risk management has not improved so far and accounting regulation is remarkably lax. Thus, many communities are debt using financial products known as "structured" that large banks were delighted to sell, because they are high margin products. These products offer to borrowers of advantageous conditions during the first years at the cost of a risk, sometimes very important over the medium term.

According to a study of the Fitch rating agency published last year, one of the products have met with the favour of local communities is a "product barrier on exchange rate" which gives a very advantageous rate for three years, but then submits the borrower to a very high foreign exchange risk. After three years, paid interest rates depend on the euro/dollar exchange rate fluctuations and can soar! When you know the volatility of the foreign exchange market, such a contract appears as extremely risky. In this period of crisis when currencies are particularly volatile, this type of contract led the borrower to pay rates to largely exceed 10. Fitch believes the stock of the structured products for French communities in about 20 or 25 billion euros, very unevenly distributed. If one adds all local governments, the stock of structured products would be of the order of 30-35 billion.

Why have both elected officials and local administrators bitten to the hook of structured products There is no doubt that the large banks marketing departments are for something. Beyond that, it appears that local public accounting rules are often pernicious. In General, only the rate of heavily subsidised initial interest in the structured product appears in the accounting balance sheet and is not required to make provisions for future losses related to the risk of the product. In fact, in some cases, when the use of a structured product has proven to be catastrophic, the local community renegotiates with the Bank another structured product which has the effect of lowering the rate of immediate interest, but at the cost of a future risk even higher! The Bank found his account and the risk is still worn by the borrower. The local community is thus committed in a sort of leak in front where his accounts were healthy air but only because they do not reflect future risks. The sous-information of local communities to these very complex products is probably to blame. This is one of the leitmotifs of the current crisis: the structured financial products based on the "sub-prime" were so complex that some buyers had no idea of their risk.

But one wonders if the incentives of local elected representatives have not had they also played a negative role. Elected representatives have any interest to conceal the real debt to their communities until the next elections by purchasing structured products. In this, their incentives cut those traders who have interest to take positions that report lot of money in the short term, because they get so big bonus, even foolish risks over the long term. After me, the flood... A single remedy in one case as in the other: a transparent accounting and sensible regulation.