There is a risk that defaults on these debts could impose significant losses on financial institutions and could lead to a general loss of confidence and a tendency for liquidity to recede in a range of funding markets. To date, efforts by policymakers to address risks associated with the build-up in debt have focused on restructuring local government debt.
High-interest off-balance sheet funding has been swapped with the issuance of low-interest local government bonds; that is good for local governments but comes at the cost of putting more pressure on banks and other lenders by reducing their interest income.