Cooperative Municipal Lending in Sweden

Abstract

This paper studies a municipal credit agency, which is a specialized financial institution facilitating municipalities’ access to international capital markets. I document that gaining access to the agency’s credit facility decreases municipal borrowing costs compared to commercial bank loans. Built in the agency’s lending terms, I find support of a coinsurance mechanism across municipalities. Nevertheless, net gains of improved credit access must dominate since almost all municipalities have voluntarily joined. Finally, I could not detect evidence that a municipality’s participation in such a municipal credit agency adversely affects its fiscal discipline.