NEW YORK — AS Japanese banks tighten their purse strings, state and local governments in the United States will feel the pinch, since many now depend on letters of credit from Japanese banks when they issue municipal bonds. In recent years, the credit ratings of many local governments have plummeted, raising the interest rates they must pay to attract investors. To reduce financing costs, the governments pay a fee to banks to guarantee their bonds with letters of credit. With their superior credit ratings, and willingness to charge lower fees, Japanese banks have garnered a huge share of this market.
But the slowdown in asset growth will extend to the letters-of-credit market, a prospect that makes local government finance officers nervous.
``Without the Japanese banks there are some projects that can't be financed,'' says David Perel, an administrator at the Los Angles Housing Production and Preservation Department. Even if access is not curtailed, local governments will still have to pay more for loan guarantees from Japanese banks. Greater attention to profit levels is leading banks to raise their letter-of-credit fees.
``We will not be as aggressive as before on pricing,'' says Masahiro Nagayasu of Fuji Bank. Recent declines in the credit ratings of major Japanese banks, caused by their over-exposure to the shaky Japanese real estate market, will also raise the interest payments on bonds backed by Japanese banks. Moody's recently downgraded the rating on 288 municipal bonds backed by Fuji Bank and Dai-Ichi Kangyo Bank, worth over $13 billion, after having lowered the rating on the long-term debt of those banks.