Private vs. Public Debt: Explaining Municipal Borrowing Patterns of Mexican Cities

State and local authorities are hedging and issuing debt in order to deal with the financial crisis,” Jose Manuel Arteaga reported in an August 13, 2009 article in El Universal, a Mexican daily. Since the 1997 Legal Reform of Article 9 of the National Fiscal Coordination Law (NFCL), which allowed municipalities the right to take out commercial bank credits, there was a new emphasis on public debt in Mexico. But following the financial crisis, President Calderon sent in a “bail-in” to the largest development bank, Banobras of more than $1,800 million pesos. Since then, private capital investments have decreased and a number of firms have collapsed. The proposed paper seeks to study how and why municipalities in Mexico acquire public debt with a particular emphasis on analyzing the circumstances and conditions under which municipalities should assume indebtedness. More specifically, the paper will analyze when and why municipalities take on debt; the best offers (in terms of tenors and interest rates, public or private services); the purpose of the loans (investments in infrastructure, economic development, covering operating expenses); and the rates of repayment and/or default. The main objective is to better understand the borrowing patters of Mexican cities and whether they acquire public or private debt.