Sub-sovereign bond buyback: a way forward for debt-laden regions in austerity

ABSTRACT

Previous academic literature has criticised bond buyback as a ‘”boondoggle” benefiting a country’s creditors’—meaning that buybacks are a wasteful use of public money. This paper challenges the narrow financial–economic perspective behind that statement by adopting a broader socio-political framework that includes the potential benefits of buyback for citizens, not just financial market costs. In particular, buyback does not necessarily require a budget surplus via higher local taxes and/or increased austerity measures.

IMPACT

Although debt brake and balanced budget rules strengthened limits established in the EU’s Stability and Growth Pact (SGP), transitional periods allowed local governments to deviate from them. Thereafter, local government directors of finance will be faced with the growing presence of financial derivatives in public accounts and the development of sub-sovereign fiscal decentralization, both of which are affecting debt management. This paper shows how EU fiscal rules may legitimize bond buyback in the current fiscal austerity context. Both financial stability and compliance with the SGP could be addressed by adopting policies aligned towards using innovative financial accounting engineering solutions.

KEYWORDS:

• Bond buyback
• ‘boondoggle’
• creative accounting
• debt management
• fiscal consolidation
• public sector austerity

Acknowledgments

We would like to thank Fabrizio Tesseri and Maria Cannata from the public debt management area at the MEF, as well as staff members at the financial office of the Regions of Campania, Lazio, Liguria, Lombardy, Marche and Puglia, for their availability and kindness.

Disclosure statement

No potential conflict of interest was reported by the author(s).

ORCID

Davide Eltrudis http://orcid.org/0000-0002-5821-2634

Patrizio Monfardini http://orcid.org/0000-0001-8615-4841