The Diffusion of Risky Private Capital Financing across English Municipalities

In comparative political economy, the causes and patterns of the financialization of public debt policies are still underexposed. By analyzing the diffusion of risky private capital financing across English municipalities, this paper seeks to fill this gap. Until the end of the 1990s, English municipalities possessed little financial autonomy. This changed in 2004, with the Local Growth Agenda initiating a great devolutionary reform, which aimed at giving local officials more freedom in their financing decisions. Equipped with newly gained financial powers and pressurized by central government’s austerity policy, municipalities increasingly financialized their borrowing practices that were advocated by British and other European banks. In 2014, however, local councils were heavily criticized for lavishly handling tax money by making extensive use of so-called LOBO (Lender Option Borrower Option) loans. These complex borrowing instruments with an average lifespan of 50 years give banks the option to periodically raise the interest rate and its borrowers the burden of high exit penalties. News coverage with headlines like ’How Councils Blow Your Millions’ spurred public outrage and critical inquiries from government officials and public initiatives alike. This paper analyses the determinants that caused local authorities to take up LOBOs, considering their alternative borrowing options through less risky government loans. Incorporating a novel, large-n data set, we run an event history analysis for the period from 2004 until 2014, that includes general predictors like the level of local debt and the local treasurers’ financial expertise as well as indicators for regional levels of financialization and innovation.