In the EU, the specialty municipal banks have been the traditional funding source besides tax sharing and governmental transfers for Local Governments (LGs). With the decentralization process, LGs experienced different market-based options so that banks were no longer the only source of funding. However, with the onset of the Eurozone crisis, public sector debt is no more risk-free, and the cost of borrowing became unstable over time. To minimise such risks, Central Governments forced LGs to adopt general principles of control of local borrowing. Previous studies evidenced that centralised controls affect unitary countries more than federations. This paper investigates the Centralised Discipline and Control Model to understand whether it generates hidden costs. For such a purpose, the paper compares municipal bonds against borrowing from banks in Italy, a European unitary country. This paper highlights the existence of hidden costs for Italian LGs because the Central Government set up an expensive system for controlling the entire public sector debt. Policy makers should pay particular attention to which model of control to adopt by considering their country’s specific characteristics and the potential impacts of the different models on them, according to the present economic circumstances.
Previous literature criticised bond buyback as a 'boondoggle benefiting a country's creditors', meaning that buybacks are a wasteful use of public finance. This paper challenges the narrow financial-economic perspective behind that statement by adopting a broader socio-political framework that includes the potential benefits of buyback for citizens, not just financial market costs. In particular, buyback does not necessarily require a budget surplus via higher local taxes and/or increased austerity measures.
Purpose: There is broad consensus across different studies in considering decentralisation as a critical factor for increasing the responsiveness of Local Governments (LGs). For this decentralisation process to be operational, financial autonomy is essential. Since LGs may access financial markets to secure their self-sufficiency, this study focuses on the financial autonomy of LGs based on municipal bonds. However, the centralised control of borrowing is supposed to decrease financial autonomy, especially in unitary countries. Focusing on the time when the municipal bonds were wide spreading in Italy, that is unitary indeed, the paper investigates the capacity of municipal bonds to increase the financial autonomy of local governments. Reference is also made to the European fiscal rules, that were getting stricter in the same years, because these constitute an excellent example of this control model. Approach/Methodology/Design: Addressing this goal, this paper relies upon Generalized Least Squares (GLS) regression of longitudinal (panel) data. Findings: Findings show that financial autonomy strictly depends on tax-raising powers, but municipal bonds may help. There is indeed statistical evidence of the relationship between financial autonomy and bond issuing, reinstating the idea that municipal bonds could qualify as an instrument of financial autonomy forLGs. Practical Implications: However, to benefit from this positive relationship between municipal bonds and financial autonomy, the constraints of the centralised model need to be reduced or the model of control to be changed. Originality/Value: The issue is not just whether the use of municipal bonds granted financial autonomy to local governments, but rather that their usage may generate growth and maintenance of financial autonomy within the centralised discipline and control model.
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