Municipal annuities found a ready market soon after their development in the 13th century, because municipalities received steady tax income — much steadier than territorial governments:
Usually, lenders were given a prior claim on a specific sources of tax revenue. For example, in Amsterdam, collection of the excise taxes on beer, wine, and grain was contracted out each year to tax farmers. The latter, as part of the arrangement, were required to make payments on all outstanding annuities before passing on any excess to the authorities.
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Cities and towns rarely defaulted: municipal government was generally controlled by merchants, a group highly cognizant of the reputational cost of default. Moreover, all citizens or freemen of a city or town were jointly liable for its debts. Consequently, in the event of default, any merchant or property from the offending municipality could be seized for ransom. This recourse was available, of course, only to people living outside the town in question. As a result, municipal debt tended to be held by citizens of other towns, and investors generally avoided the debt of their own towns. To further protect themselves, investors diversified: one individual was recorded as receiving payment from 120 different issuers.
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Territorial governments found it much harder than municipal governments to tap the market for annuities, because their credit was inferior. Government debt was essentially the personal debt of the prince. Like other nobles, a prince could sell rents on his personal or ‘ordinary’ income. This consisted mainly of income on his domains but it might also include traditional taxes and mining royalties. Princes were more constrained in their ability to impose taxes than municipalities: some sort of parliamentary consent was generally required and it was far from automatic. Therefore, for princes, tax revenue or ‘extraordinary’ income was less promising as a basis for annuities than they it was for municipalities. However, the greatest handicap for princes as borrowers was the lender’s lack of legal recourse in case of default: a prince could not be sued in his own courts.