Municipal Debt Management Under Efficient Financial Markets : A Case Study of Eskilstuna Municipality

Sammanfattning

Municipalities rely on debt financing to fund long-term investments in infrastructure and public services. However, changes in interest rates and increased financial uncertainty have made debt management an important strategic challenge. This thesis examines how municipalities balance borrowing costs and financial risk when structuring their debt portfolios, with a specific focus on Eskilstuna Municipality. The study investigates whether Eskilstuna’s debt strategy can be considered economically rational under the assumption of efficient financial markets. The study applies a mixed-method approach combining quantitative regression analysis and qualitative interview-based analysis. The empirical analysis uses data from Swedish municipalities to examine the relationship between debt structure, debt levels, and financial costs measured as net interest expenses as a share of total revenues. The regression models include variables such as debt per capita, capital maturity, interest fixation period, political orientation, and market conditions to evaluate how different factors are associated with municipal financial costs. The results indicate that debt structure plays an important role in explaining differences in financial costs between municipalities. Higher debt levels and longer maturity structures are associated with increased financial costs, suggesting a trade-off between cost minimization and financial stability. The analysis also indicates that Eskilstuna’s strategy reflects a risk-management perspective, where the municipality accepts potentially higher costs in exchange for reduced exposure to refinancing risk and interest rate volatility. The findings suggest that Eskilstuna’s debt management strategy cannot be considered universally optimal, as optimality depends on institutional conditions and market assumptions. However, the strategy appears economically rational and consistent with theoretical principles regarding efficient markets and the balance between borrowing costs and financial risk. Due to limitations related to sample size and the observational nature of the data, the results should be interpreted as associations rather than causal effects.