Municipal debt and the effectiveness of institutional restrictions on credit discipline (1988-2000)

The period of profound normative change currently affecting Spanish city councils creates a new climate of uncertainty and calls for an assessment of the municipal finance scenario. The specific aim of this paper is to study the financial and credit situation of Spanish municipalities from 1988 to 2000. A breakdown of this analysis will enable us to consider different strata of population, since there may exist wide discrepancies from the legal configuration of income sources and spending power laid down in national guidelines. The present investigation focuses on two particular issues. First, we evaluate the rules of access to debt on the part of municipalities and past trends in City Council debt policy in Spain. The second objective is to try to gain an econometric perspective on debt issues in Spanish municipalities by estimating panel data by population layers. A set of hypotheses, formulated to explain municipal debt, is empirically tested. The study period is restricted to the financial years for which budgetary settlement data were available (1988-1998). Reprinted by the permission of the Instituto de Estudios Fiscales (Ministerio de Hacienda, España)