Guidelines on Local Government Borrowing and Recent Developments in South East Europe
2. What to consider in the national legislation?

2.4. Local debt guarantees and pledges

Potential investors want, and need loan repayment pledges or guarantees. Depending on the type of guarantee, costs of borrowing can be lower or higher. Local governments can provide various types of loan repayment guarantees: they can pledge physical assets, such as land or buildings, or general revenues from taxes and transfers, or projectgenerated revenues from user fees or charges collected from the project's beneficiaries. Pledging physical assets rather than revenues has certain disadvantages:

local governments may need to pledge physical assets that have a higher value than the debt being secured,

a pledge on land or building is prone to corruption,

municipalities might pledge assets that are needed for providing essential public services

securing loans only with physical assets can lead to less concern with revenue streams and cash flows, and whether they are sound enough to allow borrowing,

Revenue interception is a special form of pledge. It is an instrument that is particularly credit enhancing since it is very effective in reducing credit risk.10 If local governments are not able to meet their debt obligations, revenue interceptions authorize the creditor to collect debt repayments directly from higher levels of government. Revenue interceptions are therefore usually taken from intergovernmental transfers.

Local governments may also provide guarantees for third party debt repayments, such as those of local public enterprises. If allowed, such guarantees should be:

Authorized in the same manner as sub-national debt,

Restricted to projects in the public interest

Limited to third parties created or controlled by the local government.

Table 5: Type of allowed guarantees and collaterals:

  Allowed Allowed
Own revenues Albania, Bulgaria, Croatia, Kosovo, Macedonia, Moldova, Montenegro, Republika Srpska, Romania, Slovenia, Turkey  
Physical property Albania, Bulgaria, Kosovo, Macedonia
(partly), Montenegro, Slovenia, Turkey
Croatia, Moldova, Republika Srpska, Romania
Reserve funds Albania, Croatia, Kosovo, Macedonia, Montenegro, Turkey Bulgaria, Moldova, Republika Srpska, Romania, Slovenia
Private insurance Slovenia Bulgaria, Croatia, Kosovo, Moldova, Republika Srpska, Romania
Others Macedonia: Credit enhancements (guarantees by USAID through Development Credit Authority)