Credit: Mark Flynn Photography
The inter-authority lending market risks becoming a two-tier system, with many councils placed on “naughty lists” despite having minimal credit risk, treasury professionals have warned.
Citing Animal Farm by George Orwell, Danny Mather, head of corporate finance at Warrington Borough Council, described the local authority borrowing market as one where “some animals are more equal than others”, with many councils now refusing to lend to certain counterparts.
Disputing claims that there is low liquidity in the market, he stated that “there is enough liquidity in the market” but that the unequal treatment of councils is the reason some cannot secure loans.
Speaking at Room151’s LATIF North event in Manchester, he explained: “What I mean by that is we seem to be getting to a two-tier market, with authorities on naughty lists.”
Mather questioned how it had reached the stage where advisers and councils themselves were making lists of authorities that are deemed “too risky” for lending, despite no local authority ever defaulting and the risk being minimal—something many in the sector acknowledge.
“I have spoken to colleagues in the sector who have said that if their policy applied to their own authority, they couldn’t actually lend to themselves,” he said.
Acknowledging that Warrington is probably among the councils placed on the “naughty step”, given its debt of around £1.8bn, Mather questioned how far this approach to “risk” would go. “Do you now exclude those 30 authorities who have sought EFS (Exceptional Financial Support)?”
“We will get to a point where the only authorities lending in the market are Westminster and combined authorities,” he added.
Addressing Mather’s claims, a delegate from the audience argued that the decision to exclude certain authorities from borrowing was politically, rather than officer, motivated. “This is member-driven, that people are on naughty lists, putting pressure on s151 officers to stay clear of some authorities, but it is ridiculous,” they remarked.
Speaking to Room151 on the sidelines of the conference, representatives from some local authorities with exclusion lists echoed this point, saying the policy was in place to avoid member discontent or complaints. Others simply stated they would not lend to certain councils because they disagreed with their investment strategies.
This comes as interest rates in the local authority lending market have risen, with some rates reportedly trading over 100 basis points above SONIA swaps.
‘Virtually no credit risk’
However, some in the sector have argued that if local authorities are unwilling to lend to each other, it raises questions over why private sector lenders should do so.
Speaking alongside Mather, Khadija Saeed, head of corporate finance at Lancashire County Council, said: “All local authorities have a responsibility to act as part of the sector, and to speak on behalf of the sector, so where there is misinformation, it is an example of where you should be part of the education process.
“So it is important to highlight that all local authorities have the same credit risk.”
Innes Edwards, principal treasury and banking manager at City of Edinburgh Council, agreed, stating that there is “virtually no credit risk” when lending to local authorities, with the government’s support of Thurrock Council demonstrating this.
However, he added: “I do think you should have some level of local accountability and decision-making. So far as, when we do duration, we only do it with Scottish authorities—not exclusively, there are some we do them with—to give members an extra level of comfort.”
Mark Finnegan, lead treasury accountant at West Midlands Combined Authority, stressed the importance of communicating with members. “That is not just a one-day story, and there is a narrative that follows that, which should be reassuring,” he said.
Commenting on discussions earlier in the day, he added: “It is also reassuring to hear s151 officers say they don’t want to walk away from an unbalanced budget.”
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