Subnational Insolvency: Cross-Country Experiences and Lessons

Policy Research Working Paper No. 4496

43 Pages Posted: 7 May 2009

See all articles by Lili Liu

Lili Liu

World Bank - Poverty Reduction and Economic Management Network (PREM)

Michael Waibel

University of Vienna - Faculty of Law

Multiple version iconThere are 2 versions of this paper

Date Written: January 27, 2008

Abstract

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.

Keywords: Insolvency, Bankruptcy, public entity, municipality, province, creditors

JEL Classification: H70, H74, H63, H82

Suggested Citation

Liu, Lili and Waibel, Michael, Subnational Insolvency: Cross-Country Experiences and Lessons (January 27, 2008). Policy Research Working Paper No. 4496. Available at SSRN: https://ssrn.com/abstract=1400640 or http://dx.doi.org/10.2139/ssrn.1400640

Lili Liu

World Bank - Poverty Reduction and Economic Management Network (PREM) ( email )

Washington, DC 20433
United States

Michael Waibel (Contact Author)

University of Vienna - Faculty of Law ( email )

Schottenbastei 10-16
Vienna, A-1010
Austria

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