Cash-strapped Camden Council is on the verge of starting a multi-billion pound private bond market with an alliance of councils nationwide to help fund future spending.

The council is one of 48 local authorities close to signing up as shareholders in the Local Capital Finance Company (LCFC), set up by the Local Government Association (LGA), which is planning to issue bonds on the London Stock Exchange.

The LCFC is expected to issue two bonds, each worth between £250million and £300m, in the next year, starting from March or April.

Due to the sheer size of the municipal bonds, dubbed “munibonds”, investment is expected to be reserved for banks, pension funds and insurance companies, which councils will then be able to borrow from at competitive interest rates.

Camden Council expects to make savings of £400,000 a year – enough to sustain two libraries or fund neighbourhood policing in Camden Town – through the bonds, as a result of the reduced rates on offer in the private market compared with government loans.

Cllr Theo Blackwell, cabinet member for finance and technology policy, said: “The municipal bond scheme, a common feature in city government in the USA, allows the council to borrow, if it wants to, at a better rate than the one it is currently forced to do via the government’s Public Works Loan Board (PWLB).

“Despite historic low interest rates designed to encourage investment, the PWLB rate is set higher than what you get at market so the Treasury can make money from councils.”

Cllr Blackwell revealed the council is also preparing to pool part of its £1.1billion pension fund with contributions from other London councils in a similar pan-London scheme aimed at funding infrastructure projects.

He said: “Both these things are using the financial power that councils have to serve the public interest and at a level where it doesn’t create a risk to public services. It’s about making our money work harder for us.”

Westminster City Council is also set to become a shareholder in the municipal bond scheme, but Barnet and Haringey councils have not shown an interest.

The scheme is forecast to issue £2billion worth of bonds over the next three years.

Conservative councillor Don Williams, shadow spokesman for finance and technology policy, urged the Labour administration to be wary of the risks involved in allying with other councils, warning against falling into a “eurozone situation”.

“We are going into bed with other councils of differing credit ratings,” he said.

“One member or two members can drag the whole group down. If there’s one bad apple, like Greece for example, it can contaminate the whole group and make the credit rating worse and increase the borrowing costs.”