Municipal derivatives

Local budgets and global finance: Municipal governments´ engagement in the derivatives market and the role of transnational service firms (PhD project)

Researcher: Sebastian Möller

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Project overview: Over the last decade, municipalities in different countries have become highly connected with global finance through a wide range of innovative products including bonds, foreign currency loans and derivatives like interest rate swaps. Such products are more than just a technical alternative or supplement to traditional municipal finance. They connect local institutions and trajectories with rules, performances, and rationalities of global financial markets. Thus, the increase of local government´s activities can be understood as an instance of financialization of the public sector. In some cases, municipal derivative purchases have been scandalized in the media as instances of incompetent and irresponsible bureaucrats or politicians particularly when they generated losses for the city´s budget. On the one hand, this interpretation points to the crucial fact of uneven levels of financial market expertise between local treasuries and their contract partners. On the other hand, blaming individual politicians misses the patterned character and transnational dimension of spreading financial market activities. This dissertation project therefore aims at mapping, analyzing, and comparing derivative purchases of city governments in four different European countries (Germany, Austria, United Kingdom, Italy) in order to understand why and how local authorities have been engaged in this market. Particular attention will be devoted to role of transnational service firms (banks, consultancies, law firms etc.) that are assumed to be drivers of the financialization of local governance.

Research question(s): Why and how did municipal governments in different European countries become involved in the market for interest rate derivatives?

Relevant subquestions include:

  • What are the drivers of using derivatives in muncipal debt management?
  • How do the relevant public-private networks involved in the transactions look like?
  • What role did (transnational) service firms play in the promotion, implementation, and diffusion of derivatives in municipal debt management policies?
  • How were local authorities persuaded?
  • How did the idea of “active public debt management” became popular and who advocated it when and why?
  • How can we make sense of global-local intermediation? (How locally rooted is global finance? How does the global affect the local and vice versa?)

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