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CIPFA DISMISSES NEED FOR CREDIT RATINGS

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CIPFA has moved to deflect calls for the credit rating of councils. In an analysis of councils' financial status pu...
CIPFA has moved to deflect calls for the credit rating of councils. In an analysis of councils' financial status published today, the institute says credit rating is an irrelevance for councils which use approved borrowing instruments.

The institute's comments come just two months after the leading credit rating agency IBCA announced it was offering to rate councils (LGC, 20 May).

IBCA argued that banks already draw informal distinctions between councils on the basis of image and levels of debt, and that it would be healthier to put credit rating on a more formal footing. It said the informal assessments were used by individual institutions to ration their credit available for the local government market.

The CIPFA report says where councils use approved borrowing instruments, all councils should be regarded as having the same credit worthiness, making credit rating unnecessary.

But the institute warns that the same certainty does not exist when councils deal in derivatives or off-balance sheet financing which are not defined by statute. It says for these transactions credit ratings are still not needed but it advises lenders to make their own 'enquiries and judgments' on whether deals are legal.

The institute says its opinion that councils should be viewed with equal credit status is backed by the Public Works Loans Board, the Association of County Councils, the Association of District Councils and the Association of Metropolitan Authorities.

CIPFA's head of local government, David Thomas, said: 'Where local authorities have been involved in borrowing, within the terms of the 1989 act, we are not aware of any authority which has failed to repay a loan or the interest on the due date. The security of a loan is of the highest degree of certainty.'

Institute director Noel Hepworth said the certainty which applied to borrowing did not necessarily exist for off-balance sheet transactions or other instruments such as derivatives. 'Where parties are engaged in such a transaction with a local authority, they must satisfy themselves about the legality of the transaction,' he said.

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