In parallel, borrowing conditions deteriorated for many sub-national governments, as banks and financial markets became increasingly reluctant to lend. Since late 2008, financial markets started discriminating between high- and low-quality SNG bonds, and yields reached record-high levels for sub-national governments perceived as less creditworthy.

Facing degraded finances, upward pressure on expenditures and deteriorated borrowing conditions, many sub-national governments have used public investment as an adjustment variable to reduce their budget deficits and preserve their spending on welfare, health or education. However, such policies may hinder long-term growth perspectives.