THE BLOG

Rating Game: Local Authority Borrowing Powers

13/03/2013 12:54 GMT | Updated 12/05/2013 10:12 BST

In the post grant world of housing development that will commence next year, local authorities are being encouraged to use their access to cheap money on the back of the central government rating.

This is ok but there are certain dangers.

When small regional banks in Spain borrowed independently on the back of the central government's credit rating, it led to a loss of control and ultimately the Spanish property slump.

The same could happen to local authorities here, and in the not too distant future. As credit agencies become alert to the issue, they will either reduce the national credit rating or start rating local authorities. Should the latter happen, it will be detrimental to the poorer northern areas of the country as they inevitably get hit with higher risk ratings and higher costs.

The use of local authority borrowing powers should be carefully controlled and leveraged with private sector cash to reduce their exposure to debt risk. Local authorities should, in effect, deploy borrowings on the same basis as grants - by making contributions to projects that are serviced at a lower rate of interest. The effect will be lower rents when the grant funding is mixed with more costly forms of finance.

The input level of such money would be higher than grant, since grant requires no return but it will still create a situation whereby local authorities can limit their exposure to debt while still achieving their objectives.