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Subnational insolvency : cross-country experiences and lessons

  • Liu, Lili
  • Waibel, Michael
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    Subnational insolvency is a reoccurring event in development, as demonstrated by historical and modern episodes of subnational defaults in both developed and developing countries. Insolvency procedures become more important as countries decentralize expenditure, taxation, and borrowing, and broaden subnational credit markets. As the first cross-country survey of procedures to resolve subnational financial distress, this paper has particular relevance for decentralizing countries. The authors explain central features and variations of subnational insolvency mechanisms across countries. They identify judicial, administrative, and hybrid procedures, and show how entry point and political factors drive their design. Like private insolvency law, subnational insolvency procedures predictably allocate default risk, while providing breathing space for orderly debt restructuring and fiscal adjustment. Policymakers'desire to mitigate the tension between creditor rights and the need to maintain essential public services, to strengthen ex ante fiscal rules, and to harden subnational budget constraints are motivations specific to the public sector.

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    Paper provided by The World Bank in its series Policy Research Working Paper Series with number 4496.

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    Date of creation: 01 Jan 2008
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    Handle: RePEc:wbk:wbrwps:4496
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    1. John Joseph Wallis, 2004. "Constitutions, Corporations, and Corruption: American States and Constitutional Change," NBER Working Papers 10451, National Bureau of Economic Research, Inc.
    2. Michel Noel & Zeynep Kantur & Evgeny Krasnov & Sue Rutledge, 2006. "Development of Capital Markets and Institutional Investors in Russia : Recent Achievements and Policy Challenges Ahead," World Bank Publications, The World Bank, number 7087, June.
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