The “Privatization” of Municipal Debt

Ivan T. Ivanov and Tom Zimmermann

No WP 2023-30, Working Paper Series from Federal Reserve Bank of Chicago

Abstract: We study the determinants of local governments’ reliance on bank loans using granular data from the Federal Reserve. Governments that are larger, rely on stable revenue sources, or have higher spending relative to revenues are more likely to borrow from banks. About a third of governments in the top revenue quintile have obtained bank loans since 2011, typically accounting for a fifth of their total debt. Declines in revenues, reductions in bond market access, agency rating downgrades, and relationships with financial advisers and underwriters all strongly predict higher bank loan reliance. While resemblance between bank loans and bonds is limited, loans afford governments significant financial flexibility not otherwise available in the municipal bond market. The frequent loan renegotiation and credit line use are both highly responsive to changes in credit quality, thereby tailoring debt contracts to changes in government fundamentals.

Keywords: local government borrowing; debt heterogeneity; fiscal shocks (search for similar items in EconPapers)
JEL-codes: G21 G32 H74 (search for similar items in EconPapers)
Pages: 85
Date: 2023-07-20
New Economics Papers: this item is included in nep-ure
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https://doi.org/10.21033/wp-2023-30 (application/pdf)

Related works:
Journal Article: The “Privatization” of municipal debt (2024)
Working Paper: The "privatization" of municipal debt (2024)
Working Paper: The "Privatization" of Municipal Debt (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedhwp:96669

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