Home      Login

Abstract: 

Governments increasingly are shifting public responsibilities to the subnational level, and municipalities in turn are issuing debt to finance development. Debt allows municipalities to fund the construction of projects that cannot be managed within the financial resources of a single fiscal year and to allocate repayment over a period of many years, thereby making it possible to share the tax burden with future generations that benefit from the project. Debt also can offset temporary shortages in taxes or other financial resources. However, municipalities are finding it increasingly difficult to repay all this debt. The most severe subnational debt problem is in Japan, where the overall “municipal financial deficit [is at the] high[est] level ever seen...in the world,” and matters are only expected to get worse. Japan, however, is merely the tip of the iceberg. In central and eastern European countries, municipal debt financing is leading to “deficits [that] will exceed 10 percent and deteriorate further” over time. Russia faces a “significant deterioration of the cities’ and regions’ fiscal and debt positions.” In Brazil, decentralization “has resulted in a prolonged macroeconomic crisis sparked by the growing indebtedness of the [subnational] states.” Existing or potential concerns have arisen in Mexico and Argentina. Indeed, the problem extends to subnational entities in many of the world’s most developed countries. In Switzerland, Italy, Spain, France, Germany, the Nordic countries, and the United Kingdom, for example, “[t]here have been many cases of localities getting into financial distress, even defaulting.” A number of major municipalities have even defaulted in the United States. For these reasons, the World Bank has identified subnational debt as “one of the thorniest issues for decentralization.” The focus of this article is primarily international, to explore how nations may be able to manage the debt problems of their municipalities by utilizing fundamental and universally respected principles of bankruptcy reorganization law.

Keywords: 

Affiliations:  1: Duke University.