Abstract
AbstractBy analyzing why English local governments have made extensive use of long‐term market loans with embedded derivatives, this paper seeks to contribute to the growing literature on local government financialization. Using an original, large‐N panel dataset for the period from 1998 to 2014, we show that the configuration of the local political economy is an important driver of financialization processes: a Labour Party majority as well as fiscal and economic stress make it more likely that councils adopt risky financial instruments. As the use of financial innovations has also diffused geographically, policy diffusion impacts local governments as well. Highlighting the conditional effect of finance sector power, which only increases the use of financial innovations in very large councils, as well as the temporal dimension of fiscal and economic stress, we create ample avenues for further research.
Highlights
Since 1998, almost 50 percent of English local governments borrowed through so-called “lender option borrower option” (Lobo) loans with embedded derivatives, essentially betting on rising long-term interest rates
Supporting the descriptive evidence of the previous chapter, we find strong support for H1 on partisan politics and increasing levels of local government financialization
Given the core expectation of partisan theory – that different incumbent parties pursue different policies to cater to the interests of their constituencies, we find that party differences do help to explain the use of financial innovations in English local governments
Summary
Since 1998, almost 50 percent of English local governments borrowed through so-called “lender option borrower option” (Lobo) loans with embedded derivatives, essentially betting on rising long-term interest rates. As the use of derivatives indicates local government financialization, we ask: what drives the financialization of the state at the subnational level?. The financialization of states, in comparison, is less researched (van der Zwan 2014; Hendrikse & Lagna 2018; Karwowski & Centurion-Vicencio 2018). In the studies on (local) state financialization, the adoption of derivatives-based financial innovations by public officials has been identified as a crucial dimension of the process
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