Suddenly, Munis Have Old World Charm
When Italian-Americans get a yearning for the old country, they can uncork a bottle of Chianti and cook up some pasta. Some may put on Luciano Pavarotti singing O Sole Mio. And now, if the mayors of Naples and Rome get their way, Italian-Americans will be able to reap some dividends out of their nostalgia. Both cities are preparing to issue their first municipal bonds, including some denominated in U.S. dollars.
As those first Naples 7s of 1999 or Rome 10s of 2002 hit the market later this year, they'll be one more sign of the growing push into the world capital markets by European cities. Their municipals don't have the tax-free status of most U.S. issues, nor a volume anywhere near the $141 billion worth of U.S. munis issued last year. But Europe is "right at the beginning of what could be a very, very large market," says Michael J. McGuire, managing director of MBIA/AMBAC International, a joint venture of the two largest U.S. muni bond insurers. The venture has drummed up $3 billion in business since it was formed last September to go after the European market.
The momentum is building. Late last year, Barcelona became the first Spanish city to float munis when it came out with a $200 million, 10-year issue put together by Morgan Stanley & Co. French regions such as the Department of Seine and Marne and the city of Lille recently issued France's first munis marketed to international investors. In 1990, Standard & Poor's Corp. barely bothered with European local authority ratings. Today, it has almost 40, from the Copenhagen County Authority's AA+ to the AA of Spain's Basque country. Returns on the bonds are equivalent to those on sovereign debt.
The rush into municipals is partly to make up for spending cuts by central governments, all preparing for the projected adoption of a single European currency in 1999. With monetary union requiring budget deficits to be kept under 3% of gross domestic product, slashing transfer payments to local governments offers a quick fix.
Banks and specialized credit agencies --such as the big German Landesbanks--are the other traditional sources of funding. But it's generally cheaper for cities to raise money on the market rather than borrow from banks. And the short terms of bank financing, which range from 5 to 7 years in Spain to around 12 in France, are increasingly unattractive for funding water systems or roads whose useful life could be more than 20 years. Typical municipal obligations in the U.S. run 25 to 30 years.
Localities are also demanding more independence. Belgium's Flemish-speaking and French-speaking regions now control their budgets and are free to raise money after changes to the country's constitution in 1992. In Italy, mayors got more clout after they started being elected in 1993 rather than appointed by political parties, and laws that took effect in January give Italian cities the right to issue bonds.
SMALL FRY. Francesco Rutelli, the 41-year-old environmentalist who became Rome's first directly elected mayor in December, 1993, is taking the lead. He plans to tap domestic and international markets for about $500 million over the next year, with some of the money going to restore his city's archaeological treasures. "We need to be more financially innovative," says Rutelli. Most of the bonds will be sold in Europe, but Rutelli visited Wall Street in April. One top Rutelli sponsor in the Big Apple: Richard A. Grasso, chairman of the New York Stock Exchange and a leading light of the National Italian American Foundation.
It could be a long time before Europe has a highly liquid, U.S.-style municipal- bond market. Each European country still has its own fiscal system and financial regulations, which make cross-border investments difficult. Issues also tend to be small in size. There's no tax exemption to attract buyers, and the lack of a critical mass of bonds means there isn't the necessary liquidity to underpin a secondary market.
All Italian cities put together are unlikely to issue more than about $2 billion a year in bonds, estimates Rome's finance commissioner. That's about a third of what New York City issued last year. But, as town councillors across Europe increasingly demonstrate, the market has finally arrived at City Hall.