Regional government access to market funding: international experience and recent developments

Regional and local public debt has grown in importance on international capital markets in recent decades. This development has mainly been due to wider progress in budgetary decentralisation in many advanced and emerging economies over the period, in conjunction with increased investor demand for this type of debt [see Canuto and Liu (2013)]. Spanish government has been no exception to this trend. Specifically, Spain’s autonomous regions have regularly accessed the financial markets, in a process paralleling the transfer of budgetary authority that has been under way since the country’s transition to democracy. Between 1995 and 2007, Spanish autonomous regions’ total debt averaged around 6% of GDP. Half of this was in the form of debt securities and the rest in that of loans from resident and non-resident entities. The economic and financial crisis that broke in 2007 caused a sharp deterioration in public finances affecting most countries and government sub-sectors. In the specific case of Spain’s autonomous regions, debt more than doubled between 2007 and 2011, rising from 5.7% to 13.6% of GDP. The financial stress caused by the sovereign-debt crisis in the euro area from 2010 onwards made it particularly difficult for the autonomous regions to tap the financial markets. At the same time, they significantly extended the time taken to pay their suppliers. State intervention was ultimately necessary to alleviate this situation, with successive extraordinary measures and additional liquidity support mechanisms for the autonomous regions being put in place in 2012. These instruments took the form of bilateral loans from central government to the autonomous regions. Thus, in 2015 Q3, 45% of autonomous region debt (which then stood at 23.6% of GDP) was in the form of loans from central government, in contrast to a negligible level prior to 2012, such that this became the main means of covering the funding requirements of the autonomous regions as a whole. The mechanisms currently operate through the “Fondo de Financiación a Comunidades Autónomas” (Autonomous region financing fund), created on 1 January 2015, enabling the low financing costs currently enjoyed by the Spanish Treasury to be passed on to the autonomous regions. Nevertheless, keeping this fund indefinitely raises the question of what the permanent system for meeting the autonomous regions’ financing requirements should be, particularly given the existence of a framework of budgetary discipline rules, such as those established in the Organic Law on Budgetary Stability and Financial Sustainability (LOEPSF). This article aims to review the essential points found in the specialised literature and international experience on the subject of how sub-central governments’ financing needs are met. It therefore describes the basic features of the recent global process of increased fiscal decentralisation, and reviews international experience with mechanisms of access to securities markets by sub-national governments, with a view to putting the Spanish case in context and drawing possible lessons.