OREANDA-NEWS. Fitch Ratings says in a newly-published report that despite the recent territorial reforms, the French subnational institutional framework still strongly backs the subnationals' solvency.

French local and regional governments (LRGs) cannot be legally declared bankrupt or be forcibly liquidated. Their solvency is also underpinned by the quality of their financial and administrative framework, which makes debt servicing one of their highest spending priorities.

Fitch considers that the laws recently passed on territorial reform will have a significant impact of the French LRGs' administrative organisation and scope of responsibilities although they will not immediately impair their standalone financial profile.

In 2014, a law (the MAPTAM Law) aimed at creating French metropolises and at opening up the possibility for other inter-municipal groupings to become metropolises (of over 400,000 inhabitants) was enacted. A broader law (the NOTRe law) was voted on 16 July 2015 to further specify the LRG's responsibilities; in particular, this law abolished the LRGs' general competence clause. A reduction of the number of French regions from the present 22 to 13, effective on 1 January 2016, has been approved.

Fitch highlights that, although French LRGs' financial and administrative autonomy is a constitutional principle, their accounting and debt regulations, and their solvency, are largely under the national legislators' remit. The central government determines the level of state transfers to LRGs, and the nature of tax reforms. LRGs' revenue is now mostly made up of non-modifiable taxes and state transfers. Fitch consider that the cuts in state operating transfers by EUR11bn overall, from 2015 to 2017 as part of the national fiscal consolidation will put further pressure on the LRGs' budgets and may lead to an overall debt increase - debt totalled EUR188bn at end-2014. However, this should be mitigated by horizontal equalization, which has been strengthened since 2012, especially for municipalities and inter-municipal groupings with the creation of the inter-municipal solidarity fund.

Fitch also notes that, within the new governance rules of the public finances planning law (PSSA) during 2014-2019, which aim at restoring the public accounts balance, LRGs are now involved in the definition of an objective target to control annual public spending. However, LRGs' operating expenditure shows little flexibility as the share of staff costs in total expenditure has increased with the devolution process, particularly for departments and municipalities.

Lastly, since 2013, LRGs have benefited from several state support measures aimed at reducing their exposure to structured debt, for example in the form of a national fund compensating local authorities for a share of the restructuring costs of their high-risk loan contracts.