Now European countries are discussing joint issuance of government bonds. But Germany, needless to say the most financially stabilized country, is against the proposition partly because Germany can issue its government bond for itself at less expensive cost. This is quite a similar situation seen in Japanese local government bond market.
In 2003, 27 major prefectures and cities started joint issuance of their local government bonds. In terms of relationship with bond holders, the issuing local governments are jointly and severally liable for the entire amount of the jointly issued bond. This makes redemption of the bond more reliable, even though none of those local governments have ever defaulted on their bonds. And because the same bond is issued in larger volume, the investors can sell and buy the bond in the market more easily. But Tokyo Metropolitan Government (TMG) didn’t take part in the joint issuance, partly because they could issue their local bond at less expensive cost.
Nonetheless, Japanese local governments issuing bonds jointly have developed a successful market. In fiscal 2011, 35 prefectures and 12 major cities are participating in the joint issuance. The yearly planned issuance is more than 1.5 trillion yen (19.2 billion U.S. dollars), which is almost doubled from 2003. The yields to subscribers of jointly issued local government bonds in 2010 were very close to those of the national government, almost the same as those of TMG and constantly outperformed the individually issued local governments bonds. In the most recent case, the yield spread between Japanese national government bond and the jointly issued local bond was less than 0.05%.
The biggest concern of issuers was the possibility of members of the pool having to cover the cost of paying back the bonds of an individual member because of its default. But under the local public finance system in Japan, the repayment of local government bonds is indirectly secured by the local tax allocation system, a bond issuance consultation system, and a financial early warning and reconstruction system all of which are authorized statutory by national law. So far, no pool members have experienced a substantial bail out of other pool member local governments.
Japan Local Government Bond Association
White Paper on Local Public Finance 2011 (Ministry of Internal Affirs and Communications)
November 29th, 2011