Blog » Learning from the Portuguese Municipal Recovery Fund
Take-aways from a fascinating presentation yesterday at the IMF on the 2014 Portuguese Municipal Recovery Fund:
The Portuguese system is well-designed, with the one significant flaw that it dilutes lender incentives to know the creditworthiness of their borrowers. The best way to avoid over-indebtedness by municipalities is to subject them to the discipline of the market place. This means that lenders must genuinely be at risk, and know that if they lend to a municipality that cannot reasonably be expected to re-pay, they will have to take the loss. We want financial institutions to be diligent in interrogating the finances of municipalities. That is what creditworthiness is all about - demonstrating to investors that a city has the financial strength, sound management, and solid planning to justify their confidence, and to be entrusted with their capital.
Financial institutions who lend irresponsibly should face the consequences "pour encourager les autres!"