Intertemporal diversification of sub-sovereign debt

Abstract

This paper presents a comprehensive empirical analysis of the debt maturity structure of the Swedish municipal sector. The Swedish municipal debt portfolio is characterized by a short maturity structure and an asset-liability mismatch that poses potentially severe roll-over risk. The 2008–2009 financial crisis manifested as a liquidity shock to the sector that highlighted the dangers of short-term funding strategies in conjunction with low levels of intertemporal diversification. In this study we analyze to what extent this led to a change of intertemporal diversification. Based on a unique contract-level monthly data set of municipal loans issued by Kommuninvest of Sweden from January 1997 to June 2016, we construct and estimate a range of dispersion and moment measures to capture the change of various distributional characteristics of the maturity structure. These measures are used as dependent variables in fixed-effects models together with a number of control variables to estimate the effect of the debt-crisis liquidity shock. The main finding is that the crisis did affect the diversification, but not in a persistent way. A possible explanation is that the municipalities found that Kommuninvest through jointly guaranteed lending was able to function as a lender of last resort and thereby mitigates the roll-over risk. It is also found that fiscal and financial properties such as debt-to-tax base ratio, tax base volatility and per capita income are associated with the characteristics of the debt maturity structure of Swedish municipalities, as well as macroeconomic factors such as the term structure of interest rates.