There is a significant difference in the severity of the debt problems of local government financing vehicles (LGFVs) across different regions, as refinancing difficulties continue to climb in financially weaker regions, with provincial LGFVs more solvent than lower-tier LGFVs, said UBS in a note.
About 25% of LGFVs will have difficulty paying interest on operating plus financing cash flows through 2022, the key questions focus on the potential economic impact of LGFV defaults, the probability of triggering systemic risk and the potential risk resolution of outstanding debt, it said.
Although some investors expected a national debt solution led by the central government, state bailout would still be carried out on a case-by-case basis, and the main responsibility is still borne by provincial governments, and due to moral hazard and the size of LGFV debt, it’s difficult to launch large-scale debt swap, it said.
Local governments are working closely with banks to push through LGFV loan restructuring, which is seen as a more viable solution, and in addition to Guizhou, banks in Yunnan and Guangxi have also started to implement pilot schemes, it said.