local governments should have the ability to borrow when they have the capacity to repay. However, for moral hazard reasons discussed in greater detail in the borrowing subsection of the KMS every effort must be made to promote the perspective that local government loans are internal obligations of local governments and not of higher levels of government unless specifically stated otherwise. The importance as well as the difficulties of doing this is well illustrated by the circumstances of subnational debt in Brazil. The legal and regulatory framework can support this message by specifying the conditions under which local governments may borrow, the limits of those borrowings, the reporting requirements for debt and debt service and the penalties for violating the rules.