Municipal debt is Concept, management and maintenance, restructuring

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

Municipal debt is the debt obligations of the municipality in the aggregate. This also includes guarantees issued to other borrowers. In our article, we will consider the concept of municipal debt, structure, types, restructuring, and also touch on issues of maintenance and management.

Structure

Municipal debt is a category that is unconditionally and fully provided by all property that forms the municipal treasury. It is expedient to designate the structure of the category as a group of debt obligations in accordance with the types of debt obligations established by the budget legislation in force on the territory of the country. They may take place as obligations associated with:

• securities of the municipality (otherwise they are called municipal securities);
• loans received by the municipality from credit institutions;
• budget loans that are attracted to the local budget from other budgets,included in the budget system of the Russian Federation;
• Guarantees of the municipality (their second name is municipal guarantees).

It should be borne in mind that the debt obligations of the municipal structure are not able to exist in other forms, except for the above.

Volume

The volume of municipal debt consists of the following elements:

• Nominal monetary amount of debt attributable to municipal securities.
• The volume of debt of the main value on budget loans that are attracted to the local budget.
• The volume of the main debt on loans received by the municipal structure.
• The amount of debt under the corresponding guarantees.
• Volume of other, in addition to designated, debt obligations that are not repaid.

Varieties of obligations

Municipal debt is a category that has a certain classification. So, the debt obligations of the municipal structure are long-term (from 5 years inclusive), medium-term (from 1 to 5 years) and short-term (less than 1 year).

The procedure for terminating the debt obligations of municipalities, which are denominated in the currency of the Russian Federation, as well as writing off the debt, are discussed in Art. 101 BK RF. Local governments use all the powers associated with the formation of local budget revenues to pay off their own debt obligations, as well as to service the debt.

The concept of managing municipaldebt

Debt management should be understood as a set of measures implemented by the state to pay income directly to creditors and repay current loans, as well as to change the terms of those loans that have already been issued. In the category of state and municipal debt management, it is also advisable to include the definition of rules and the issuance of new state debt. securities.

Governance goals

Among the goals of state and municipal debt management, it is important to note the following:

1. Economic: the maximum reduction in the cost of those external loans that are attracted; debt rescheduling and (or) improvement of refinancing factors; reduction of general costs associated with external debt servicing; increasing the efficiency of the attracted resource potential.
2. Political: Keeping the political system running.
3. Social: ensuring social stability, funding social programs in a timely manner.
4. Ensuring state security. Here it is important to clarify that the increased burden of external debt obligations may adversely affect the economic security of the country.

Stage management. Justification process

Let's consider the stages of state and municipal debt management. The management cycle in this case consists of five stages. Each of them overcome specifictasks. Among them, we note the most important.

Firstly, it is the implementation of the process of substantiating the limits of municipal debt (both internal and external), the limits of external and internal borrowing, the maximum volume of guarantees, as well as the creation of programs of external and internal borrowing. It is important to note that at this stage, the amount of the debt burden of future periods in aggregate, including external and domestic debt, as well as the types of forthcoming borrowings, is laid down. That is why such activities are considered as strategically important for the country.

Creating an emission program

Secondly, this is the formation of a program for the issue of municipal and state securities, as well as the determination of specific parameters of future borrowings in accordance with the terms of circulation, the level of probable profitability, the procedure for paying income, restrictions on owners, the procedure for placement and other conditions that make absolutely every borrowing is as attractive as possible for investors, who can be both residents and non-residents. The quality of the execution of work at this stage depends, in particular, on the absence or presence in the future of "peaks" of debt payments, as well as the flow of resources in order to repay previously made borrowings in the order of their refinancing, in a timely manner.

Third stage

Thirdly, this is the placement of bonds and, of course, the regulation of quotations for municipal and stateobligations precisely in the secondary debt market (municipal apartments, for example). Influence on quotations for bonds of municipal and state importance involves regulation of the budgetary efficiency of borrowings being sold, as well as the amount of current debt (both internal and external).

Final stages

The fourth stage is typical for the period of development of the Russian Federation after the collapse of the USSR. This stage is associated with the implementation of measures, the need for which is determined by the relevance of crisis situations or bad debts. If the government cannot organize the servicing of municipal debts and repay them, then it begins negotiations with creditors regarding the revision of payment schedules and the maturity of debt obligations. Following the discussion, the parties may take one of the following decisions:

• Deferred payments.
• Full or partial cancellation of debt.
• Debt restructuring.
• Early redemption of obligations.
• Implementation of securitization and so on.

The final stage is the execution of the original or modified payment schedules. It is advisable to include the repayment and servicing of municipal and state debts of an internal and external nature.

Tools

Municipal debt is a category that requires full governance. That is why it is advisable to list the tools for its implementation. Thus, different methods are widely used by subjects (state and municipal bodies). Their use is associated withthe fact that in some cases there are circumstances that prevent the return of received debt obligations and the corresponding interest in a timely manner. That is why there is a need to defer payment of debt or change the terms of the loan.

Market-based instruments used to manage public debt include the following: debt refinancing, debt restructuring and debt rollover. It is advisable to consider each of them separately.

Debt restructuring

Using this method, the debtor can achieve a revision of the original service schedule and repayment of municipal and state debt. According to the new procedure, the debtor has a grace period during which only interest is paid. In addition, the period of repayment of the amount of cash, which is the main debt, is increased. Debt restructuring is often accompanied by the write-off of part of the principal debt, as well as the consolidation of previously issued debt obligations.

Under the consolidation of loans, it is necessary to understand the change in their conditions (usually forced) associated with the timing. There is usually an increase in the maturity of loans that have been issued by converting current liabilities and converting short-term loans into long-term loans.

The methodology is mainly used for debt crisis management. As a result of the restructuring, additionalmonetary resources in order to ensure economic growth and pay off public debt in the future. Nevertheless, at the same time, restricting access to sources of resources, in particular, to international financial markets, becomes relevant.

In accordance with the RF BC, debt restructuring is considered as termination of obligations based on an agreement. It is worth clarifying that we are talking about debts that form state or municipal debt. Moreover, it is relevant to replace them with other debt obligations, which provide for fundamentally different conditions for repayment and servicing (Article 105 of the RF BC).

The specified procedure can be implemented with a partial reduction (write-off) of the principal debt. Please note that the cost of servicing restructured debt is not included in the amount of costs associated with servicing debt obligations in the current financial year, if the corresponding amount is included in the total amount of restructured debt.

Debt rollover

Prolongation of state and municipal debt, unlike restructuring, involves the extension of the period of the obligation. It is done to make payments easier. Prolongation is a tool that is not used for the management of state. debt, there is no such form in the budget legislation of the Russian Federation.

Refinancing

Refinancing should be understood as the repayment of old debt through the adoption of new obligations. It should be noted that in relation to government loans, at timesapply the concept of debt refunding. Today it is customary to use three key methods of refinancing loans:

• Finance ministries implement, with the consent of the holders of debts, their replacement with expired repayment periods for new ones in amounts equivalent to those repaid;
• carry out early transactions related to the replacement of some obligations with others with longer repayment periods;
• organize the placement (sale) of new bonds and use the proceeds to repay securities with expired redemption periods.

Conclusion

So, we have considered the concept, maintenance, the limit of municipal debt. In addition, we analyzed the categories of refinancing, prolongation and debt restructuring, which act as management tools.

In conclusion, it should be noted that operational management in Russia is carried out by the Government of the Russian Federation, the Ministry of Finance of the Russian Federation. It is important to name the Central Bank of the Russian Federation and Vnesheconombank as agents of the Ministry of Finance. The unified management system in relation to the state debt of the Russian Federation is defined in the Decree of the Government of the Russian Federation of 1997-04-03.

Debt obligations of the Russian Federation, a constituent entity of the Russian Federation, a municipality are fully secured by the entire property complex owned by the Federation, a constituent entity of the Russian Federation, a municipal structure. This property constitutes the corresponding treasury, and the fulfillment of obligations is carried out at the expense of the funds of a particular budget.