Are Central Government Rules Okay? Assessing the Hidden Costs of Centralised Discipline for Municipal Borrowing

Abstract

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.

Optimising the Supervision of the Use of Village Funds through the Digital-Based Village Guard Program at the Bantaeng District Attorney's Office

“…Secondly, the research findings demonstrated that the program contributed to enhanced accountability among village officials (Chandra et al, 2022;Eltrudis & Monfardini, 2020;Pariyasiri, 2022;Senshaw & Twinomurinzi, 2022). With digital records and a systematic tracking system in place, it became easier to monitor and evaluate the use of village funds.…”

On the Financial Autonomy of European Local Governments: The Case of Municipal Bonds in Italy

“…The literature (Ter-Minassian and Craig, 1997;Bailey et al, 2009;2012;Cepiku and Mussari, 2010;Eltrudis and Monfardini, 2020) has identified four models for the governance of municipal borrowing to consider the contextual differences and differences in control approaches: the market discipline, the local political discipline, the centralised discipline, and the professional discipline. The centralised discipline and control model postulates the need for bureaucratic controls and relies on detailed rules that LGs must meet for them to borrow.…”

“…As a result, the European municipal bond market is smaller than the sovereign bond market (Medda and Cocconcelli, 2018). Moreover, it is particularly underdeveloped in unitary countries because adopting the centralised discipline and control model generates higher and hidden costs for the LGs that borrow from the financial markets (Eltrudis and Monfardini, 2020). Municipal bonds' spreading as an alternative to bank lending was hampered by the start of the European Union's Stability and Growth Pact, especially in unitary countries that preferred the bank lending channel over bonds as a source of debt funding (Peterson, 2003).…”

“…The most striking example is the role of the principle of financial autonomy, its effective implementation, and its extent on the local accounts (Cepiku and Mussari, 2010). If the need for close monitoring outweighs the appeal of autonomy such a legal framework generates hidden costs for the LGs which borrow from the financial markets (Eltrudis and Monfardini, 2020). With central government policies intended to 'contain expenditures rather than to improve efficiency and effectiveness' (Anessi-Pessina and Steccolini, 2005), it will not be possible to make widespread use of municipal bonds in European unitary countries.…”

Economic Fluctuation, Local Government Bond Risk and Risk-Taking of City Commercial Banks

“…The adjustment of bank risk-taking in response to economic fluctuations is an operational requirement, and the influence of the government on banks is also common in the world [41], but there are few studies combining the three factors. More importantly, different from the existing research background, the CCB and the city investment company (CIC) are enterprises with Chinese characteristics and are experiencing the reform wave of economic and financial system.…”