Features of the functioning of the domestic borrowing market in the United States

Annotation. The article examines the foreign experience of government borrowing and analyzes their forms, tools and methods of engagement. The analysis of the state debt and the features of the debt policy are determined. Singled out the main features of the functioning of the domestic borrowing market in the USA.

Key words: state borrowing, budget deficit, US state debt, treasury federal borrowings, municipal borrowings of local self-government bodies.

The present stage of development of the global world economy characterizing by the development and integration of financial relations of different countries of the world. There is a lack of financial resources for the effective development of countries and overcoming the effects of the global financial crisis. The governments of countries always forced to seek additional sources of money attraction through government borrowing {1}. Therefore, an important task is the study and analysis of foreign experience, the process of government borrowing and debt policy.

Despite the large number of scientific studies devoted to highlighting this topic, it remains relevant, as the use of US, experience in attracting debt capital will enable the government to pursue an effective debt policy. At the same time, there is no comprehensive and systematic analysis of foreign experience in terms of elements of the system of financial and economic mechanism for regulating public debt.

The main objective of this work is to study the main aspects of debt settlement in the United States to improve the efficiency of government domestic debt management.

Domestic borrowing in developed countries of Europe and the world is one of the key places in solving budget deficit problems, and largely – in project financing of the relevant sectors, sectors, areas of the state economy and the problems of individual settlements and enterprises of state and local importance in particular. One of the flagships in this process is the United States of America, where the system of domestic state borrowing has gained special significance in the securities market, reflected in the effective system of functioning treasury and municipal debt securities of the United States {2,3}, without appropriate control system {4}.

The markets for government borrowing in developed countries have the following characteristics that distinguish them from the corporate market and allow them to attract a wide range of investors: low credit risk, high liquidity and preferential tax treatment. Low credit risk means a small reality of the emergence of a situation that will not pay the lender the amount invested by them in government bonds. The administrative and legal authorities of the state in the person of his government provide government loans. Government borrowings always have higher rating ratings compared to corporate issues and in most developed countries rank higher in rankings. In most countries, interest income on government securities has a preferential tax treatment, and in many cases is not taxed at all. Therefore, in the United States, government bonds are not subject to tax at the state level. The above characteristics have led to greater security of transactions with government securities for investors, compared with corporate issues. However, the need to regulate the government securities market not only persists but increases substantially at this time. In this regard, it is necessary to find out which model of regulation provides optimal results [5].

There is a view that the United States Government bonds considered the most reliable investment instrument in the world. US bonds are crucial for the global stock market: potential risks and potential returns estimated based on the situation on US bonds. As you know, the lower the risk on the instrument, the lower the profitability. The United States has the highest AAA credit rating. Regarding to this, when the profit is working in compilation with US government bonds in low level it will not satisfy all private investors.

The growth of US public debt at a rapid pace has led to the fact that today the country is considered one of the leaders of the countries in the state borrowings, which is due not only to crisis processes at the world level. First of all, the growth of the state borrowing market is due to the growth of the budget deficit due to significant military expenditures, reduced tax revenues to the budget, increased social payments, reduced federal budget revenues, increased unemployment benefits, and increased costs for developed packages of economic incentives. Thus, despite the fact that the US economy is one of the most powerful in the world, the need to finance a budget deficit due to these reasons, causes an increase in the ratio of public debt to GDP of the country. At the same time, the growth of public debt in Ukraine by 633.64% is due to the lack of medium and long-term budget planning, fiscal policy insubordination, volatility and unsystematic government policy on government borrowing.

On the US bond market, several types of securities are traded. Among them, the most popular are:

• Treasury bills issued for the term of 3, 6 and 12 months. Profitability for these instruments is formed by selling securities at a discount to the nominal price. The discount rate is a discount of 360 days. For example, a bill with a nominal value of $ 10,000, whose term ends in 360 days with a discount of 0.46, will be sold at a price of $ 1,995;
•  Treasury notes are medium-term government debt instruments (2 to 10 years), on which investors pay a fixed interest;
• Treasury US bonds issued for a term of 10 years involve the payment of coupon income. Under coupon long-term bonds, the investor pays an aggregate interest equal to the coupon rate, while the US Treasury pays half of the coupon rate every 6 months

A separate type of US debt bonds are TIPS – bonds protected from inflation. In addition, there are non-standard issues of securities: Cash Management Bills (short-term bills, used by the government of the country in case of extreme necessity and characterized by higher coupon payments), 20-year bonds. Typically, volumes of non-traditional bond sales are significantly lower than monthly tranches for 3-year and 10-year bonds. US mortgage bonds are property-backed securities that make them even more attractive in terms of reliability [6].

The common feature of all US treasury securities is their high credit rating, the availability of tax privileges (exemptions from state and local income taxes), high levels of liquidity and reliability at a low level of income. At the same time, they all have the character of debt instruments and are used to finance public debt. In this case, it is not about the target nature of the issuance of treasury securities and the direction of attracted funds to finance investment projects. This is due to the specifics of the political system of the United States and the transfer of a significant number of powers to individual states, which at their discretion dispose of borrowings in the stock markets. The same applies to bonds of federal agencies (Agency Bonds) placed by individual government agencies and government financial corporations. Such bonds have the support of the government, but they are not guaranteed, as such issuing institutions act as private entities. Despite sufficient liquidity, a higher level of income (compared to treasury securities), the availability of tax privileges (exemption from state and local taxes, but not federal ones), and this type of debt securities does not involve borrowing for project financing. Their purpose is to attract the support of the respective circle of voters (farmers, students, etc.) and to ensure their current expenses [7].

The American market demonstrated the credibility and benefits of market principles of government securities market management. In practice, even the largest European markets in the primary market were dominated by non-competitive ways of placing public liabilities (syndicate, closed tendering), the institution of primary dealers was absent, and responsibility for placing the issues in the primary market was reliant on central banks. Secondary markets were not permanent, and in some countries (in Spain), most were absent, so the use of government securities transactions for monetary regulation of the economy was complicated. Recently, after the implementation of reforms, almost all European countries, the differences in the regulation of markets of government obligations are increasingly disappearing [5].

In addition to federal government bonds, there is another type of securities issued by state governments, territories (for example, Puerto Rico) or other departments or government agencies that are not federal (city municipality, local government). These securities are called municipal (municipals) (although, as stated, they are not always issued by the municipalities themselves) [8].

Municipal bonds market consists of two parts: the primary market and the secondary market. The primary market is the market for the placement of newly issued bonds. The secondary market is a market in which municipal bonds are sold after they have been sold underwriter, and by the time of repayment. The existence of a secondary market gives bondholders the ability to easily convert bonds into cash (that is, provides liquidity of bonds). The degree of liquidity of securities – this is a question that investors always pay attention to, and if the liquidity is high, then such bonds are valued higher [9].

The vast majority of the US municipal debt market is currently calculated based on the issuer’s creditworthiness. The financial condition of the municipalities has shaken due to the recent recession. The issue of determining the level of creditworthiness is now a more important factor in the investment process than at any time in the last two decades. To determine creditworthiness, they use two different methods: the first is to assess the issuer’s default probability, and the second to determine the appropriate credit spreads that are based on the analysis of a specific issue of the issuer, taking into account the relevant credit rating and market environment. The probability of default according to US Federal Reserve data for the municipal market is not significant [10].

Municipal debt bonds in the United States can be divided into two main types:

1. The General Obligation Bond is a municipal bond, interest payment and principal, which is secured by the total income potential of the issuer, usually tax revenues.
2. Revenue Bond is a municipal bond, the revenues of which are payable at the expense of revenues from the investment project for which it was issued (for example, stadium construction financing, bridges, hospitals, etc.). At my opinion A. Batuyeva offers more opened definition of this financial instrument: «Bonds secured with receipts are bonds issued by public-legal entities (state, municipality) and / or public legal entities (legal entities based on public-law education or statutory the capital of which it predominantly participates, as well as legal entities that perform any public functions (on the basis of an agreement with public-law formations or a license) «[11].

Of particular note is the second type of borrowing. They are issued based on revenues from projects implemented by municipalities: transport, housing, educational, infrastructure, etc. The source of payment in this case are payments to consumers of services, for example, for the use of public utilities, water, electric (userfees), or payment for the use of roads, parking lots, etc. (tools, concessions, fees). The share of revenue bonds is very significant and amounts to about 60-70% of the total volume of municipal borrowings. Issued also bonds for the development of industry and other activities, which provide for benefits from taxation of income on securities. We note that in order to solve the problem of the construction of low-cost municipal housing in the United States, housing bonds issued by the state government or the government department of the state responsible for housing construction are actively used. Funds received as a result of the issue are issued in the form of a loan to the developer. Subsequent repayment is carried out at the expense of the rent, levied on residents. In the case when the share of housing remains undistributed, the developer has the right to implement it on the open market and pay the debt of the municipality (or state). Usually this scheme applies to housing construction for families with low and middle income, for the first time they buy their own housing [12].

In the US stock market, local bond yields are always higher than government bond yields. This is understandable, because by its nature local bonds are considered more risky than state-owned ones. In order for local bonds to be attractive for investment, it is necessary that their income is higher than the yield on government bonds [13].

In addition to bonds with a general guarantee and bonds for income, distinguish between combined bonds or, as they are called, with double-barreled bonds. Such securities are provided with the reputation and overall financial status of the issuer, as well as the proceeds from the project, which is financed by the issue of bonds. Along with a bond with this level of protection in the United States, the issuance of bonds with a moral guarantee – that is, issued by a state or a municipality – and which contains only a moral obligation to pay principal and interest, is also practiced. It is clear that the level of income for such securities is higher. It is also worth mentioning about such specific securities as the Municipal Improvement Certificate – a valuable paper of local authorities issued for financing public projects and is repaid at the expense of tax revenues from those interested in the implementation of these projects [14].

Also, industrial development bonds (ODA) in the United States, which are referred to as «municipal bonds for the needs of the private sector» in the 1986 Tax Reform Act, are bonds issued by a state or municipality government to finance the non-budget sector. In general terms, the purpose of issuing bonds of industrial development is to stimulate economic development. Typically, revenues from the ODA issue are directed at the construction of such facilities, the operation of which corresponds to both private and public interests – for example, the creation of new jobs or the strengthening of local tax base at the expense of the multiplier effect produced by the growth of municipal orders to the local economy.

In general, municipal bonds in the US are characterized by the majority of the same features that are inherent in other fixed income securities. However, there are at least three features (except for the issuer type) of municipal bonds that distinguish them from other instruments of the class of fixed income assets:

First of all, it is a tax-free status, which is often granted to income from municipal bonds at the national level. It is believed that this feature is the main stimulant of investment in municipal bonds in the United States. In general, the municipal bond market in the United States is the largest in the world, both in absolute terms (about $ 1.5 trillion) and in terms of the specific weight in the domestic debt securities market (about 11%).

Secondly, municipal bonds often have a lot of repayment dates, that is, they are issued in serial bonds (serial bonds). Although they are considered and registered as a single issue, in fact, these are several separate issues, securities that are not interchangeable and traded separately [15].

If we talk about the share of municipal bonds markets in the aggregate volumes of domestic bond markets, then two points should be noted: 1) this share is small (the maximum is 10-11% in the USA) and 2) this share in most countries is decreasing.

Agree with I.P. Petrenko points out that various types of government borrowings in the United States, issued by the state and certain territorial units, have shown that in the arsenal of these entities there are several effective instruments for financing investment projects. Treasury securities, as a rule, do not have the specific purpose of attracting investment resources, borrowed funds are directed to cover the costs of the state budget, so here we can only talk about the indirect financing of state investment measures. At the same time, municipal debt securities are more in line with the above requirement. The local authorities of the states and settlements are actively practicing the issue of bonds to attract investment resources. Bonds under income occupy a key position among municipal debt securities. The reason for this should be seen in the nature of bonds for incomes protected not only by guarantees of local authorities, but also backed up by revenues from the implementation of investment projects. The funds attracted from their emission are used for their intended purpose – to implement socially useful plans, revenues are partially devoid of tax burden, and the risks associated with the implementation of projects, lead to a relatively high level of return on bonds.

Thus, the peculiarities of functioning of the domestic borrowing market in the USA consist in segmentation of this market in the framework of two main components: treasury federal borrowings and municipal borrowings of local self-government bodies. Typical features of treasury federal borrowing are their purpose – borrowing to meet budget needs, while they are characterized by high financial capacity and significant reliability for the borrower within the framework of effective state guarantee programs. However, municipal borrowings, with the purpose of financing specific social and economic projects, are represented by several groups of bonds: bonds with a general guarantee, bonds for incomes, combined bonds, industrial development bonds. The specified segment of the market of domestic state borrowing involves the financial provision of specific investment projects and is provided either by tax revenues from local budgets, or as a percentage of the profit of investment projects, as well as a combination of these two means of collateral. The effectiveness of municipal borrowing is illustrative and is an important tool for providing those sectors of the economy that are outside the federal government, while being the most socially driven projects.

The mechanism of the formation of US public debt traces the specific features and features of this process, but one can identify a general evolutionary scheme under which accumulating obligations and general methods and instruments for debt settlement, resulting from the accumulated world experience in solving debt problems, can be identified. The current situation in the field of US government borrowing is characterized by a balanced policy and the transition to the use of active debt management methods to reduce the cost of its maintenance. The process of government debt management is at the stage of transition to a single system, which includes unified and multi-faceted elements of government debt regulation. An integral part of a public debt regulating system should be debt planning, which is organically combined and implemented on the basis of a common methodology with budgetary and macroeconomic planning. Based on the study of foreign practice in solving the debt problem, one can distinguish the following areas of improvement of the mechanism for regulating public debt:

• definition and legislative consolidation of the direction of the debt strategy, in particular regarding the ratio of the internal and external components of government borrowing;
• establishment of a public debt management agency that is accountable to the Ministry of Finance and focused on debt risk management;
•  development and implementation of a medium-term program for regulating public debt as an element of the structure of an effective system for planning public indebtedness.

Conclusions

In Ukraine, one can use the experience of the USA, which consists in segmentation of the internal borrowing market by components: treasury federal borrowings and municipal borrowings of local self-government bodies. In this case, special attention should be paid to non-state and non-municipal borrowings, which are guaranteed by the relevant authorities and local self-government bodies. In this case, treasury federal borrowings are used only to meet budget needs and are characterized by high financial capacity. Feature of municipal borrowing is the financing of specific socio-economic projects, bonds for income, combined bonds, bonds for industrial development. The specified segment of the domestic government borrowing market provides financial support for specific investment projects and is provided either by tax revenues from local budgets, or as a percentage of the profit of investment projects, as well as a combination of these two means of security. Represented by several groups of bonds: bonds with a general guarantee.

Alina Biliavska
university lecturer, Ph.D. student,

Nadezhda Ryazanova
Candidate of Economic Sciences,
Aassociate Professor of the Department of Financial Markets
Kyiv National Economic University named after Vadym Hetman

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