Cutting down public sector debt or funding investment? The fit-for-purpose perspective

ELTRUDIS, DAVIDE

2018-03-26

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Abstract

The reduction of public debt assumed primary significance in the European political and economic debate in the last decades, and only recently European Union member states agreed to sign the Fiscal Compact (part of the Stability and Growth Pact) to pursue progressive reduction of their public-sector debt as the over-riding strategy for “fiscal consolidation”. However, the attempts to reduce the debt have been accompanied by harsh austerity policies whose negative consequences seemed not compatible with European’s ideals of social justice, equity and solidarity. In accordance with the belief that there is no universal solution to the debt overhang matter, this thesis investigated different funding and debt reduction strategies for public governments. The thesis is divided into three different papers, which consider different aspects of municipal bonds and bond buybacks, and differ in the research design, by using quantitative, qualitative and mixed research method as appropriate. The innovative element of this work is to consider whether the different approaches fit-for-purpose from an enlarged point of view, which involved both the economic and financial standpoint, and the political and social sides. In the first paper, an explanatory mixed research design (Creswell and Clark, 2011) has been used to analyse the rationale of municipal bonds. Before, it has been conducted a systematic quantitative analysis of each emission, determining the exact costs of bonds; then a survey explained the quant findings, also investigating qualitative features. Mixed-methods has been applied because neither quantitative nor qualitative methods, if used on its own, succeed in describe the reasons why LGs issued bond. The second paper relies on econometrics analysis (Baltagi, 2008) of financial and accounting data of LGs which issued municipal bonds. Generalized Least Squares regressions of panel data have been carried out in order to establish whether bonds help LGs to improve their financial autonomy. Finally in the third paper, through a qualitative exploratory case study (Yin, 2011), the 2015 Italian regional bond buyback has been analysed with the purpose to draw attention on eventual positive sides of bond buybacks, despite distinguished academics had warned about the negative consequences resulting from their use. Even if the first two articles focused upon the use of municipal bonds to fund investments, and the last paper focused upon the bond buyback as a strategy to reduce the public-sector debt, each of these papers converge in saying that all depends on how the rules have been drawn up and on whether or not such rules have been modified. In the first, it emerged that the regulatory choices taken by central government restricted the approach to funding to the only banking channel making bonds unfit; in the second, it became clearer that the European approach to fiscal consolidation resulted in the recentralisation of powers limiting the financial autonomy of LGs; finally, the third paper has focused on European fiscal rules in order to show that bond buyback might be a way out to avoid negative consequences of austerity policies. Italy and other member countries have to cope with the trade-off between to observe European financial rules and develop policy to encourage investments. The solution to this puzzle involves to find alternatives to finance investments which do not affect the compliance with the Stability and Growth Pact, therefore the fit-for-purpose perspective may suggest a more effective use of financial strategies to satisfy them both simultaneously, meeting at the same time the European’s ideals in the austerity framework.