Risk Factors and the Maturity of Subnational Debt

We study the determinants of the maturity structure of public debt, taking as case study the regional governments of Spain. The structure of public debt is a source of vulnerability and contagion in public debt markets. Our empirical models show that regional governments reacted to increasing financing needs by leaning more toward short-term debt, instead of resorting to longer-term debt to seek the minimization of liquidity risks, a fact that is consistent with theories that predict the willingness of public financial managers to reveal to the markets their fundamental solvency and their commitment to fiscal (consolidation) plans. At the same time, we find that increased central government transfers raise the tendency of markets to hold long-term instruments, which may reflect their expectation that regional debt be bailed out/guaranteed by the center. Finally, we do not find evidence of significant differences in the maturity structure depending on the quality of the issuer.