Municipal Debt and the Derivative Market: Interest Rate Swaps As an Emerging Social Relationship Between Local Authorities and Transnational Finance

Over the last decade, municipalities in different countries have become highly connected with global finance through a wide range of innovative financial products including bonds, foreign currency loans and derivatives. Such products are more than simply technical alternatives or supplements to traditional municipal finance. They connect local institutions and trajectories with rules, performances, and rationalities of global financial markets and thus constitute an emerging social relationship. This emerging relation both drives the orientation of local governance towards financial market logics and is in itself a manifestation of the overall financialization of politics and society. While sovereign debt on the national level is at the heart of current debates in political economy, municipal finance so far plays only a marginal role in the literature. Particularly, the engagement of local governments in the derivative market merits closer academic scrutiny. Understanding how interest rate swaps constitute the relationship between a local treasury and a transnational bank allows understanding the interactions between public and private actors and their underlying motives, mutual dependencies, and the spread of financial market logics and ideas more generally. The paper therefore addresses the following empirical and conceptual questions:

1. What are the motives/reasons of municipal governments’ derivative purchases?
2. How can the relationship between local authorities and transnational service firms be characterized?
3. What is the role of personal networks in constituting the relationships between municipal government and financial markets?
4. What institutional, political and ideational implications can follow from an interest swap deal at the local level?

Those questions will be examined for the case of Linz (Austria). Moreover, findings will be compared with preliminary evidence from other European countries in order to explore commonalities that go beyond idiosyncratic properties of that case.