Credit Enhancements and the Romanian Municipal Bond Market

Cornelia POP, Maria-Andrada GEORGESCU


Under the combined pressure of increased urbanization, fiscal adjustments and decentralization, central governments were pushed towards accepting the idea of local government accessing the private finance sources for their public infrastructure and service development investments. While the importance of borrowing increases for local developments, the main challenge many small municipalities have to face is the difficulty to access private financing sources. One obstacle is related to the creditworthiness of the municipal debtor or bond issuer. Sub-national governments can overcome the problem of creditworthiness through the use of credit enhancement mechanisms or techniques. The present paper is the first to discuss the situation of credit enhancements for Romanian municipal bond financing, its consequences and the path that might be followed for their further development. The absence of appropriate credit enhancements can be considered among the factors that contributed to the underdevelopment of the Romanian municipal bond market segment mainly between 2011 and 2014. In order to improve the municipal bond market profile, Romanian local governments should not ignore credit enhancements for any future bond issue and a combination of internal credit enhancements and bond pooling, as external credit enhancements seem to provide a feasible solution.


bonds, municipalities, credit enhancement, Romania.

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