Abstract
Local government (LG) debt increased worldwide during the past decade. Yet, LGs need increased access to financing so they can maintain and expand their community’s infrastructure. Expanding an LG’s bond-related debt (while continuing to meet ongoing debt-service obligations) is essential to its sustainability. An LG must both contain its credit risk and make its risk profile available to potential investors. Credit risk determinants in mature bond markets (e.g., the U.S.) have received considerable attention while those in non-mature markets have not. This paper contributes to the sustainable development literature by (a) identifying the risk-premium drivers in non-mature markets (using the bond market for Italian LGs as an example); and (b) providing LG policymakers with guidance on formulating policies to reduce their debt cost (either directly, by targeting its determinants, or indirectly, by improving the bond market’s functioning). LGs with comparatively high financial dependency on other governments, high criminal activity, and low operating revenues incurred higher bond-related costs than LGs without these characteristics. These LGs can improve their sustainability by (a) providing transparent and understandable financial information to potential investors; (b) reducing criminal activity; and, (c) increasing the frequency of external auditing.
Highlights
Local governments (LGs) play a crucial role in the sustainable development of their communities and, more generally, of their countries as a whole [1]
Controlling for the bond structure, size, and sovereign risk (BTP-Bund spread), we find that the level of current revenues (LnCR), transfers from other government entities (LnTOG), debt saturation (LDB), income per capita (IC) and the Mafia index dummy (MI) are all statistically significant determinants of the LGs’ spread at issuance
Debt saturation, transfers from other government entities and the Mafia index dummy are positively related to the spread at issuance; i.e., LGs with higher debt, lower internal revenues, and operating in a province where public administrations have Mafia-related criminal records face additional costs to issue bonds compared to their peers
Summary
Local governments (LGs) play a crucial role in the sustainable development of their communities and, more generally, of their countries as a whole [1]. To be successful, they need regular access to financing. Some of this growth has been in countries, such as Japan and Italy, where total public debt exceeds GDP [4] This debt burden, if not well managed, can affect the sustainability of an LG when it needs to expand its infrastructure to meet growing citizen demands. Sustainable growth in infrastructure requires having a reasonable debt burden [5], and an ability to meet ongoing debt-service obligations
Sign-in/Register to view highlights & summary Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
