7. Insolvency frameworks for state and local governments

High indebtedness of subnational governments (SNGs) can lead to serious peril, undermine their proper functioning and impair the provision of essential public services (Figure 7.1).

By depriving governments of needed fiscal capacity, it may hinder their ability to cope with acute crises, such as the COVID-19 pandemic. Such indebtedness may also deter infrastructure financing and public investment and thus limit long-term growth. Most notably, increasing debt of a single subnational government can generate negative externalities for other SNGs and the central government by diminishing their creditworthiness and increasing overall borrowing costs. Excessive SNG debt levels raise the likelihood that a debt default leads to contagion, thus impeding all government levels from access to borrowing, and even threatening overall financial stability – as experienced by Argentina. The central government may be forced to bail out SNGs, which can risk triggering unsustainable fiscal policy by SNGs, if the possibility of bail-out encourages moral hazard behaviour.

This chapter stresses the benefits of introducing insolvency frameworks for subnational governments and analyses existing frameworks in Colombia, Hungary, South Africa, Switzerland and the United States, as well as other frameworks discussed in the literature. It also provides options for designing and implementing a subnational insolvency framework with the aim of preventing subnational insolvency and facilitating recovery from a budgetary crisis. The chapter has been adapted from Herold (2018[1]), which contains additional detail and more complete references on the topics covered.

Insolvency frameworks provide rules to resolve unsustainable borrowing in an orderly and prompt way, in an effort to deter bankruptcy and preserve crucial fiscal capacity (Blöchliger and Kim, 2016[2]) (Figure 7.2). More precisely, they define how to proceed when a subnational entity has gone bankrupt, which can include clarifying how debt will be restructured, identifying which public services will be maintained, and enumerating steps to restore the financial health of the insolvent SNG. In addition, they may stipulate debtors’ and creditors’ rights and regulate third-party intervention.

Insolvency frameworks serve to enable a fresh start and to promote a fiscal recovery of highly indebted governments. They may also underpin the commitment of upper-level governments to a no-bailout policy and thus may prevent subnational governments from piling up debt to unsustainable levels. However, only a few countries have established insolvency frameworks, but even these commonly apply only to the local or municipal levels, and only rarely to the provincial or state levels.1 A summary of the findings of this chapter with respect to the effective design of subnational insolvency frameworks is presented in Box 7.1.

This chapter proceeds as follows: the first part discusses the motivation of insolvency regimes for subnational governments. The second part concludes by describing the design options for insolvency regimes and includes a general framework.

Subnational governments (SNGs) including state and local governments play a large role in public finances in many countries. In most, SNGs are responsible for the provision of essential public services (e.g. education, infrastructure maintenance, garbage collection, water supply). OECD-wide in 2014, SNGs accounted for 31% of total government spending and 19% of own revenue (from own and shared taxes and user fees).2 The gap between subnational spending and subnational own revenue – the vertical fiscal imbalance – is bridged by intergovernmental transfers or subnational borrowing.

SNGs incur low levels of public debt compared with the central government. In 2020, SNG outstanding debt represented on average only 13% of GDP and 14% of combined national and subnational debt in the OECD. However, as SNGs have less taxing power and draw on a much smaller revenue base than central governments, a better indication of their capacity to repay debt is given by debt relative to revenues rather than GDP. SNG debt is high as a share of SNG revenues and has increased in the majority of OECD countries, amounting to 150% on average in the OECD in 2020. Apart from the relatively stable fiscal position of many SNGs, some were hit hard by the global financial crisis and the COVID-19 pandemic (Figure 7.3).

High SNG indebtedness may be driven by institutional deficiencies (e.g. limited taxing capacity) or persistent structural problems where revenues from own sources and intergovernmental transfers are insufficient to meet the spending obligations. It may also be attributed to the existence of a soft budget constraint: if the central government is unable to credibly commit to a no-bailout policy in case of a subnational financial crisis, SNGs are likely to engage in moral hazard. Budget discipline may become lax, leading to excessive deficits, which in turn elicit transfers from central government.

A number of factors influence the likelihood of bailouts and the occurrence of soft-budget constraints. For example, regions might be considered too big to fail, too small to fail or too sensitive to fail. Bailout expectations might be driven by political-economy factors such as the same party affiliation of higher and lower-level governments. They may be affected by imbalances in the assignment of spending, revenue and borrowing autonomy. They are shaped by explicit or implicit bailout guarantees such as constitutional rules prohibiting debt enforcement against subnational assets or demanding solidarity in case of subnational financial distress. Bailouts in the past may serve as precedents for future bailouts.

The negative implications of excessive subnational debt call for various measures that safeguard and restore subnational financial discipline and address the problem of soft budget constraints.

During the last decade, many countries have strengthened their budgetary institutions to restrict excessive subnational borrowing (Blöchliger and Kim, 2016[2]). Budgetary institutions are rules and regulations according to which budgets are drafted, approved and implemented. They include fiscal rules, procedural rules and rules regarding the transparency of the budget and may be complemented by fiscal or intergovernmental councils and other arms-length agencies.

Strengthening budgetary institutions may contribute to subnational fiscal discipline – as empirically shown for the American states by Von Hagen (1991[3]), Poterba (1994[4]), Alesina and Bayoumi (1995[5]) and Fatás and Mihov (2006[6]). However, cross-country evidence for the positive relationship between the strength of budgetary institutions and subnational fiscal discipline is ambiguous (Fornasari, Webb and Zou, 2000[7]; Jin and Zou, 2002[8]). For example, in many cases strict rule enforcement is not achieved. Borrowing restrictions can be evaded by using sale-and-lease-back operations (Jorgen and Pedersen, 2002[9]; Letelier, 2011[10]) or by accumulating off-budget debt (Ahmad, Bordignon and Giorgio, 2004[11]).

Excessive debt is not only facilitated by weak budgetary institutions and a high degree of borrowing autonomy; it is also due to imbalances between subnational spending, tax and borrowing autonomy, leading to a low degree of fiscal autonomy. These imbalances of fiscal autonomy and misalignments with responsibilities are predominant in so-called mixed systems, where SNGs have large spending and borrowing powers, exhibit little tax autonomy, and thus depend heavily on federal transfers (e.g. fiscal equalisation schemes, tax sharing arrangements, and other intergovernmental transfers).

Imbalances of fiscal autonomy and misalignments may force local government to debt finance their assigned tasks when revenues from taxes and transfers are not sufficient. It may also set fiscal disincentives. Other than in federal countries like Switzerland, or unitary countries like the United Kingdom where budget decisions are internalised by each jurisdiction, mixed systems like that in Germany create fiscal externalities allowing debt to be shifted to other jurisdictions (Blankart and Klaiber, 2006[12]): SNGs draw on resources, which are not their own (the “common-pool problem”) and expect to be bailed-out in case of an emergency. Then, they are likely to overspend, reduce tax-raising efforts and run large deficits (see Figure 7.1).

Case studies from Italy (Bordignon, 2000[13]), Argentina (Webb, 2003[14]; Nicolini et al., 2002[15]) or Germany (Seitz, 2000[16]; Rodden, 2003[17]; 2005[18]) as well as some cross-country empirical evidence (Rodden, 2002[19]; Singh and Plekhanov, 2005[20]) have shown that the existence of large vertical fiscal imbalances and a high degree of transfer dependency are related to less fiscal discipline. According to Bartolini et al. (2015[21]), both subnational and central budget balances deteriorate with the declining degree of correspondence between subnational own revenues and spending. Blöchliger and Kantorowicz (2015[22]) also show positive correlations between low fiscal coherence of constitutions, which includes imbalances in fiscal autonomy and a low degree of responsibilities, and negative fiscal outcomes.

SNGs draw on different liabilities, including loans, government bonds, arrears to suppliers and pension liabilities (Box 7.2). Creditors like lenders and bondholders reward budget discipline with low borrowing costs and punish the deterioration of fiscal fundamentals. The higher creditors assess the risks of future defaults, the higher is the interest rate a subnational entity has to pay. Capeci (1994[23]) and Bayoumi et al. (1995[24]) confirm the disciplinary function of market institutions. They show for American municipalities that, when debt levels rise, bond yields increase first gradually at low and then rapidly at high debt levels. Above a certain debt level, credit becomes rationed.

In many cases, the credit market does not effectively limit subnational borrowing (Blöchliger and Kim, 2016[2]). Often adequate information about the borrower’s outstanding debt and repayment capacity is not available. Moreover, in a number of countries, SNGs can draw on loans either from central government (Ireland, Slovak Republic) or from banks which are related to SNGs (Denmark, Finland, German municipalities). In this way, SNGs get privileged access to financing and do not compete with private borrowers. In case of positive bailout expectations, creditors may under-price subnational default risk. They grant highly indebted SNGs credit at preferential conditions, irrespective of their financial situation.

A number of empirical cross-country studies (Schuknecht, von Hagen and Wolswijk, 2009[25]; Sola and Palomba, 2015[26]; Beck et al., 2016[27]) show that the link between fiscal fundamentals and the cost of borrowing – indicated by the yield spread of SNG bonds – breaks down, if bailouts are explicitly provided or implicitly anticipated. While bailout expectations improve credit conditions for SNGs, they deteriorate the conditions of the central government. Jenkner and Lu (2014[28]) provide evidence using Spanish data that – once a bailout is announced – default risk is transferred from the sub-sovereign level to the central government, simultaneously decreasing subnational risk premia and increasing sovereign ones.

The mere existence of an insolvency framework may signal that the upper-level government is likely to refrain from a bailout and reduces creditors’ and debtors’ moral hazard. Creditors might expect that their (subordinated) claims will lose value in case of a subnational insolvency. They are forced to scrutinise the creditworthiness of the SNG and price in the probability of subnational defaults and the possible debt discharge (e.g. through putting a higher premium on the borrowing rate). To avoid high borrowing costs, limited access to the capital market and/or the stigma of bankruptcy, the debtor may pursue a prudent fiscal policy. Hence, insolvency frameworks may serve to prevent SNGs from bankruptcy (the “preventive function). They complement and enforce existing measures to safeguard financial discipline and to harden the budget constraint of SNGs.

The insolvency framework can serve to solve collective-action problems like holdouts arising in the debt-negotiation process (Box 7.3). Debt restructuring may involve extending the maturity of debt and reducing the amount of interest and principal payments. In the case where a minority creditor is able to block a majority creditor, the minority may strategically hold out from agreeing to a reasonable restructuring plan in the hope of recovering payment on the full contractual claim or obtaining more favourable terms. This might even induce willing creditors to vote against a restructuring (McConnell and Picker, 1993[29]). Consequently, holdouts reduce the value of the other creditors’ claims. Ultimately, they create substantial delays in finding a solution to the debt problem and prevent a rapid recovery.

The holdout problem may be a particular issue for SNGs whose debt is held by a large number of bond investors rather than by a single bank, as is the case in American states (Conti-Brown, 2012[30]). The United States’ subnational debt does not consist of loans, but mainly of debt-securities (e.g. government bonds) (see Box 7.2). Changing payment terms of the bonds (e.g. maturity date, coupon, repayment of a bond) in general requires unanimous consent among bondholders. Due to the high number and diverse, constantly changing identities of the bondholders, this can hardly be achieved (Schwarcz, 2011[31]).

Apart from its corrective and preventive function, an insolvency regime also serves as an insurance device against the long-term negative effects of exogenous shocks such as sharp decreases in public service levels. A restructuring of debt, such as rescheduling or even a partial cancellation, allows the SNG to recuperate from adverse events without being forced to make unreasonable decisions on spending cuts and tax increases. Debt repayment may also be postponed until economic conditions improve.

Furthermore, insolvency regimes can enhance the transparency of the finances of subnational entities. Fiscal transparency is an integral part of many existing insolvency frameworks, as filing for insolvency requires SNGs to disclose all fiscal and financial information, which is often scrutinised by independent third parties.

For coping with subnational financial distress, countries rely primarily on budget rules and budget institutions to restore the financial health of subnational governments. Table 7.1 provides an overview of the measures of selected countries (for more detail see (Herold, 2018[1]), Table A.1.).3 In most countries, some form of consolidation plan has to be elaborated that defines expenditure cuts and tax increases. Measures may also involve some intervention by higher-level governments, which, for example, monitor the implementation of consolidation plans and approve subnational borrowing decisions. In some countries, higher-level governments can put an SNG under forced administration – as found in some states in Germany. The state government can appoint an administrator to take over some or all tasks of a municipality where the measures mentioned above turned out to be insufficient. In Denmark, non-compliant local governments may in theory face sanctions (e.g. penalties), though they are rarely imposed in practice. SNGs may also be assisted by transfers. For example, in the Netherlands, financially troubled municipalities (so-called Article 8 municipalities) may receive supplementary grants, if revenues are significantly and structurally insufficient to cover necessary outlays. The Spanish government may provide liquidity through transfers to autonomous communities and local corporations.

Only a few countries have regulations that deal with subnational insolvencies. Many countries, such as Denmark and Australia, have not developed any rules dealing with the resolution of debt in case of a subnational fiscal crisis. In Germany and Norway, insolvency proceedings against assets of the states (Germany) or counties and municipalities (Norway) are even prohibited. In these countries, states or municipalities/counties cannot be declared insolvent.4 Other countries, like Austria, explicitly allow debt enforcement against municipal assets, but do not have specific rules on how to proceed in case of an insolvency (Nunner-Krautgasser, 2013[37]). In Turkey, municipalities may not become subject to bankruptcy proceedings but to debt enforcement according to the Code of Debt Enforcement and Bankruptcy (1932). In Switzerland, the personal and corporate insolvency law is only applicable to the cantons and regions. Swiss municipalities in financial distress may become subject to an insolvency framework – as outlined in Box 7.4.

The effectiveness of insolvency frameworks’ corrective function can be analysed by reviewing some cases. Fewer conclusions can be drawn about their preventive function (this is an area for further investigation).

The Hungarian Municipal Debt Adjustment Law was applied to 38 filings between 1996 and 2010. About half of them were caused by projects related to overinvestment, imprudent borrowing and rosy projections of operating expenses and revenue. The law has established a clear no-bailout rule, minimising moral hazard. It is transparent, such that no disputes concerning procedures arose in any of the cases. The local assemblies co-operated with the court and the trustee in each bankruptcy procedure. No assembly was threatened with dissolution or a new election. Vital public services were maintained in each case. However, insolvency rules may have turned out to be too strict for both the debtors and the creditors. Many municipalities that met filing criteria did not file for bankruptcy (although obligatory). The non-transparency of the accounting system (cash-based) makes it difficult to detect insolvency. Lenders and suppliers were also reluctant to initiate the insolvency procedure as they feared to lose their claims. In consequence, debt restructuring was often settled informally outside the insolvency procedure, possibly to the detriment of the other creditors (Jókay, 2013[40]).

Switzerland experienced only one insolvency case. At the end of 1998, after having piled up debt amounting to CHF 346 million due to poor investment decisions, the Swiss municipality of Leukerbad became insolvent (Uebersax, 2005[43]). The municipality was placed under forced administration. The municipal government as well as certain creditors sued the Canton Valais (Wallis) for having failed its supervisory duties. They claimed that the Canton should, as a consequence, take over the debt. In 2003, the Federal Supreme Court dismissed the claims. It decided that the law does not stipulate the cantonal liability for the obligations of the municipality. In consequence, creditors accepted a debt relief of 78% of their claims. The Canton Valais provided a guarantee of CHF 30 million (Jochimsen, 2007[44]; Feld et al., 2013[45]). Every year, Leukerbad has to repay CHF 1.3 million (Teevs, 2013[46]). Within a decade, outstanding debt was reduced significantly (to CHF 13 million at the end of 2013) which corresponded to the municipal average in the Canton Wallis (Tagesanzeiger, 2014[47]).

Besides the rehabilitation of Leukerbad, the application of the insolvency procedure generated further positive effects. It triggered the development of a differentiated rating system for the cantons and some municipalities as well as reforms in accounting standards at the municipal and cantonal level (Blankart and Fasten, 2009[48]). Most importantly, the verdict in 2003 established a credible no-bailout policy and restored the functioning of the capital market: With the court’s decision, the cantons were relieved from backing their municipalities facing serious financial problems. As a result, cantonal yield spreads decreased significantly and the link between cantonal risk premia and the budgetary position of the municipalities in the canton was cut (Feld et al., 2013[45]).

From 1980 to 2016, 305 petitions under the United States’ Chapter 9 procedure were filed, with general purpose municipalities constituting only a small part (17.5% of those from 1980-2007). Most filings involved municipal utilities, special purpose districts or other public agencies of a state. Chapter 9 turned out to be effective to restore financial viability when unsustainable debt positions were due to a one-time event, mostly by wrong investment decisions, for example by Orange County, California and Westfall, Pennsylvania. It was ineffective when the financial problems were the result of structural problems involving the erosion of the tax base, loss of manufacturing jobs and a decaying infrastructure (e.g. Prichard, Alabama and Vallejo, California). One reason is that Chapter 9 has little impact on the fiscal adjustment process and does not launch deeper administrative reforms (McConnell and Picker, 1993[29]). It might even aggravate the financial situation, for example by increasing administrative costs due to retaining legal and financial professionals, complying with court requirements or negotiating with creditors (de Angelis and Tian, 2013[38]).

The largest municipal bankruptcy filing in United States history is that of Detroit, Michigan. Having accumulated debt amounting to over USD 18 billion (USD 26 000 per inhabitant), Detroit filed for insolvency under Chapter 9 in July 2013. By the end of 2014, after 16 months, Detroit emerged from it. In November 2014, the court approved the debt restructuring plan that had been negotiated with bondholders and pensioners. According to the plan, liabilities will be reduced by USD 7 billion. Creditors experienced a substantial haircut of 80% on their claims, while pensions were cut only slightly. Fees to lawyers, consultants and financial advisors related to the bankruptcy totalled more than USD 150 million. In conclusion, the insolvency proceeding of Detroit enabled a fresh start. It launched an administrative restructuring process and attracted new industries and capital (Geissler, 2015[49]).

In May 2017, the United States territory of Puerto Rico declared insolvency. Its liabilities amounted to USD 122 billion in total (USD 35 000 per inhabitant and 124% of GDP)5 – consisting of USD 74 billion in bond debt and USD 49 billion in unfunded pension obligations (Williams Walsh, 2017[50]). As a result of failed debt negotiations, Puerto Rico was submitted to the bankruptcy-like procedure as set out in the Puerto Rico Oversight, Management and Economic Stability Act (PROMESA) since Chapter 9 is not applicable owing to its status as a United States territory. It established an oversight board of external experts with wide-reaching powers and a process for restructuring debt and other measures in order to overcome the Puerto Rican debt crisis. The law has received much criticism which raises the question about the optimal design of insolvency regimes. One concern is that Title IIII of PROMESA is substantially different from Chapter 9 rules – especially in assigning powers to the parties involved in the debt-restructuring process. Under PROMESA, the Puerto Rican government will have fewer rights than a municipal government under the Chapter 9 bankruptcy procedure (e.g. concerning the right of filing, negotiating with the creditors, making a restructuring proposal).

In the literature, some proposals for subnational insolvency frameworks can be found which specifically address the level of state governments. Schwarcz (2002[33]) proposes a general model law of a subnational debt restructuring mechanism based on United States corporate and personal bankruptcy law that could be enacted in other countries. Explicit approaches for the American states are provided by Schwarcz (2011[31]), Skeel (2012[51]) and Feibelmann (2012[52]), applying the United States bankruptcy law to the state level. An insolvency framework for the Swiss cantons is elaborated by Waldmeier (2014[53]).

Moreover, an extensive literature exists which deals with bankruptcy procedures and debt restructuring for sovereign states. The literature may also be applicable to the states and provinces in federal countries which exhibit a high degree of sovereignty and, like national governments, rely predominantly on debt financing through government bonds. The most prominent model is the Sovereign Debt Restructuring Mechanism (SDRM) developed by Anne Krueger in (2001[54]) – a formal IMF controlled mechanism for an orderly restructuring of unsustainable sovereign debt. It was extensively debated, refined (Krueger, 2003[36]; IMF, 2002[55]; 2003[56]), but finally failed to be implemented. Related work was done by Raffer (1990[57]) and Schwarcz (2000[58]; 2002[33]), Bolton and Skeel (2004[59]), and Paulus (2002[60]; 2009[61]).6 The fiscal crisis in Greece and the establishment of European Stability Mechanism led to a resurgence of discussions of sovereign debt restructuring mechanisms. An application of the SDRM to the euro area is proposed by Gianviti et al. (2011[62]). Other approaches envisaging an orderly debt restructuring mechanism for the euro area are provided, for example by Fuest et al. (2016[35]) and Andritzky et al. (2016[34]).

Insolvency frameworks for SNGs follow the same rationale as personal and corporate insolvency regimes, however they differ in certain respects (Figure 7.5).

The aim of a corporate insolvency framework is to recover money owed to creditors (e.g. by repossessing collateral assets of debtors), to rescue the business and to restore its viability through restructuring its liabilities. It may also serve to permanently wind-up a failing firm through liquidating assets and facilitating an orderly exit. In contrast, subnational insolvency regimes, like personal bankruptcy regimes, focus solely on restoring the viability of the subnational entity and enabling a fresh start. A subnational entity cannot be dissolved like a company.

While corporate insolvency regimes differentiate between viable and non-viable firms and balance the rights of debtors and creditors, subnational insolvency frameworks focus on protecting the core functions of the subnational entity. Many services need to be provided publicly so that a certain service level can be guaranteed. Hence, in the restructuring process, claims by government and employees (including pensioners) are often given priority over other claims (e.g. from creditors and suppliers). Only a limited number of assets can be seized while maintaining basic public services, whereas a wide range of assets can be sold in a private sector insolvency.

SNGs face difficulty in accurately valuing their assets and identifying the triggers of insolvency. In contrast to private and corporate insolvencies, subnational insolvencies cannot often be determined by simply comparing assets and liabilities. Some SNGs use cash rather than accrual accounting (see the next chapter of this volume). Others are protected against the seizure and sale of assets. In many cases, the assessment of insolvency has to involve a complex analysis of present and future cash flows based on a number of assumptions.

Subnational frameworks must have regard to the sovereign powers of SNGs and the democratic rights of the citizens. This constrains, for example, the creditors’ right to initiate the insolvency procedure and reduces the possibility of third party intervention into the debt restructuring and the adjustment process. While in many countries (e.g. Germany, France, and the United States) creditors may file for corporate restructuring and liquidation procedures, most subnational insolvency proceedings can only be initiated by the debtor.

As seen in Figure 7.6, the usual characteristics of insolvency frameworks can be summarised as a process encompassing the following common steps: i) initiating the insolvency procedure, ii) carrying out the debt restructuring procedure, and iii) achieving fiscal adjustment.

In the first step, the framework determines the trigger criteria which need to be fulfilled to file for insolvency. It assigns the right of filing to debtor, creditor, or higher-level government. It determines which institution (e.g. court or higher-level government) is involved in the assessment of filing and whether a stay on assets is granted to the subnational entity. Second, for carrying out the debt settlement process, the framework assigns the right of proposal (e.g. debtor, creditor, trustee) and the right to veto the proposal (e.g. court), identifies the order of claims, stipulates the creditors’ voting rights according to which the proposal is accepted and defines the seizeable assets or the essential services to be maintained. Third, the debt restructuring procedure is often accompanied by a fiscal adjustment process, which might involve third party intervention to put in place reforms and restore viability.

Insolvency frameworks have to balance different and conflicting objectives as the insolvency process unfolds (see Figure 7.6). These objectives are (Liu and Waibel, 2008[63]):

  • Providing essential public services and setting in motion the adjustment of public finances (e.g. spending and taxation) and other fiscal or structural reforms;

  • Deterring strategic default of the SNG;

  • Facilitating debt restructuring (e.g. interest reduction, maturity extension, debt relief) and solving collective action problems;

  • Protecting the contractual rights of the creditors and thus maintaining access of the SNG to the capital market;

  • Limiting interference with the authority of democratically elected local officials and constitutional rights.

Subnational entities that can become subject of a subnational insolvency procedure may comprise subnational governments as well as subnational agencies such as public companies or public-private partnerships. In Hungary, South Africa and Switzerland, only local governments, municipalities or similar entities (e.g. parishes) are subject to these insolvency laws. In Colombia, parts of the decentralised service delivery sector that are not monitored by any sectoral superintendency (administrative authority)7 are also covered by the law. The American rules define a municipality to be “a political sub-division or public agency or instrumentality of a State”. This broad definition includes state-sponsored or controlled entities that raise revenues through taxes or user fees to provide public services (e.g. school districts, hospitals, sanitary districts, public improvement districts, bridge authorities) (United States Courts, 2017[64]; Jones Day, 2010[65]).

Three different kinds of insolvency frameworks can be distinguished – depending on the role of the courts, higher-level governments or other authorities in the procedure (Liu and Waibel, 2008[63]; 2010[66]):

  • In pure judiciary frameworks, the court has wide-ranging decision-making authority in the whole insolvency process. For example in Hungary, the court decides whether a municipality is eligible for filing for insolvency, gives consent to the crisis budget and appoints a trustee who leads and supervises the bankruptcy and reorganisation process.

  • In administrative procedures, higher-level governments determine the status of being bankrupt, carry out the debt restructuring procedure and take control of subnational finances. An administrative procedure is used in Colombia because the judicial system does not always function well. Bankruptcy procedures for SNGs are led by the Superintendency of Corporation in co-operation with the Ministry of Finance and Public Debt.

  • In hybrid insolvency systems, both the court and the administration are involved in the debt restructuring process. For example, in South Africa and the United States the bankruptcy court approves the petition to file for bankruptcy and the debt distribution scheme, which sets out how debt will be restructured. The elaboration of the restructuring plan as well as fiscal adjustment is either left to the municipality itself (United States) or to an administrative authority (South Africa).

Under an administrative procedure, debt settlement and fiscal adjustment may be reached faster than under a judiciary procedure, especially in countries with an underdeveloped court system. The disadvantage of administrative systems compared with judiciary systems is that SNGs might expect the higher-level government to provide additional public funds and thus increase the risk of moral hazard. Moreover, they may be less immune to political pressures and discretionary decision making and tend to be more biased in favour of one of the parties involved. Hybrid frameworks might be superior because they combine both systems. As the court has the final decision on the debt distribution scheme or debt adjustment plan, it can be assured that the outcome is fair and equitable for all parties, assuming an efficient legal system.

Various criteria can be applied, when deciding, whether debt restructuring proceedings should go ahead. The trigger which is used by any existing insolvency framework is the necessity of the municipal entity to be insolvent, but different definitions of insolvency exist. In the United States, municipal entities are insolvent when they are unable to pay their debt now and in the future. In Switzerland and South Africa, municipalities have to show that they are unable to fulfil their bond obligations. In general, these relatively open definitions of the insolvency status require a careful examination of the financial situation of the local entity. This may involve a multi-year analysis of available reserves, the ability to reduce spending and raise taxes, and legal opportunities to postpone debt payments (McConnell and Picker, 1993[29]). For this purpose, Swiss municipalities have to provide a detailed explanation of their financial situation when filing with the administrative authority. South Africa considers additional indicators that might reveal serious financial problems and persistent material breach of financial commitments. In contrast to these countries, Colombia and Hungary apply more specific indicators of insolvency. For example, Hungarian municipalities may file for insolvency when an invoice is not disputed or paid within 60 days of the due date.

Furthermore, the South African, Swiss and United States frameworks follow the ultima ratio principle. In Switzerland, a municipality can only apply for bankruptcy if all reasonable measures have been exploited and have failed to avoid bankruptcy. In South Africa, debt restructuring is the last option within a multi-step procedure that includes an early warning system and a mandatory fiscal intervention by the provincial authority. It requires that, in accordance to the financial recovery plan set up during provincial intervention, all assets not necessary for effective administration or basic service provision have been liquidated and all employees have been laid off, except those affordable in terms of projected revenues. In the US, the municipality must have shown pre-filing efforts to work out financial difficulties and come up with good faith solutions with the creditors according to the Chapter 9 rules. Furthermore, to apply for Chapter 9, the municipality must be explicitly authorised to be a debtor by state law. In 2012, only twelve states give full authorisation, twelve conditional authorisation (attaching further preconditions), three limited authorisation (applying only to a subset of municipalities) and twenty-three give no authorisation to file under Chapter 9 (Spiotto, 2015[67]).

The definition of the eligible criteria may be crucial for meeting creditors’ claims, providing public services and preventing debtors' moral hazard. They should give a clear notion of the incidence of insolvency and eligibility for an insolvency procedure, so that creditors and local government can take appropriate actions sufficiently early to cope with their financial difficulties. Applying a simple indicator – as used in Hungary – may have the benefit of being transparent, but it may also have the disadvantage of being an imperfect proxy for the actual debt servicing capacity of the subnational government, which is influenced by financial, institutional, economic and political constraints (Weder di Mauro and Zettelmeyer, 2010[68]). It can also be easily misused for strategic default.

Eligibility criteria which involve a thorough assessment of the financial situation seem better for indicating the real need for an insolvency procedure. They should also signal to the SNG and the capital market that insolvencies are the remedy of last resort, and thus should demand efforts by the local government to solve the debt crisis – as stipulated in the South African, Swiss and American laws. This reduces the risk that a municipality files for premature insolvency (type one error). However, the triggering criteria must also ensure that the insolvency procedure is not initiated too late, e.g. when policy makers gamble for a resurrection (type two error) (Andritzky et al., 2016[34]). A delay might harm service delivery to the citizens, undermine a fair settlement of creditors’ claims and unnecessarily delay subnational fiscal recovery.

Insolvency frameworks can be initiated by the debtor, the creditors, higher-level governments or other authorities. Filing can be voluntarily or compulsory. In most countries, the debtor files voluntarily with the bankruptcy court (United States, South Africa) or the relevant authority (Switzerland). In Hungary, the municipality is obliged to apply for insolvency with the county court when it fails to meet its obligations. The Hungarian framework also allows the creditor to petition the court. In the case of Puerto Rico, unlike Chapter 9, Title III of PROMESA designates the oversight board to file on behalf of the territory with the district court.

The argument for debtor’s filing is that the debtor knows best the true financial situation and the severity of indebtedness. A voluntary rule would not interfere with sovereignty rights, but a mandatory rule or a creditors’ right as regulated in Hungary would. Hence, many proposals for sovereign bankruptcy regimes permit the debtor to initiate the insolvency procedure (Berensman and Herzberg, 2009).

However, a mandatory filing – advocated by Bolton and Skeel (2004[59]) – can be justified by the argument that subnational decision makers which fear losing their reputation might be inclined to delay the procedure, as in sovereign debt restructuring. Applying an involuntary trigger may increase the chances of a more timely bankruptcy proceeding. It may motivate SNGs to avoid financial difficulties and renegotiate creditors’ claims ex post. For these reasons, Feibelmann (2012[52]) proposes an involuntary bankruptcy procedure for American states that is initiated by the federal government: The federal government should force a state into bankruptcy if it is likely to need substantial support or threatens national financial and economic stability.

Granting creditors the right to initiate the insolvency procedures gives creditors more power, possibly reducing the costs of subnational borrowing. However, it also creates the risk of failure due to procedural delays due to conflicting interests among creditors. Bolton and Skeel (2004[59]) suggest that creditor initiated proceedings require a “critical mass” of creditors, perhaps at least 5%, to sign on to a petition for involuntary initiation in order to prevent a small group of creditors from initiating the procedure opportunistically.

The assessment of the SNG’s eligibility as well as the management and supervision of the debt restructuring process are important parts of the insolvency procedure. Whatever institution (e.g. court, trustee, administrative authority, etc.) is involved in the process, it should have the necessary prerequisites of independence, impartiality and competence.

In all existing frameworks, assessment of insolvency is left to a third party such as the (bankruptcy) court (United States, Hungary, South Africa), the cantonal bankruptcy authority (Switzerland) or the Fiscal Affairs Department (Colombia). In Switzerland, a commission of experts may assist in assessing the financial situation of the municipality.

In Hungary, South Africa, Colombia and the United States, once the petition is accepted, the court or administrative authority appoints a trustee to lead and supervise the debt restructuring process. The bankruptcy court in the United States or the SOC in Colombia serves to enforce the insolvency rules and adjudicates disputes between the debtor and creditors. Apart from existing institutions, creditors and debtors may also set up an ad hoc arbitration commission that conducts the debt restructuring process and settles disputes. This may be particularly relevant in sovereign bankruptcy proceedings (Paulus, 2002[60]) where suitable, independent supra-national institutions are missing.

Filing for insolvency may trigger a stay on enforcement for the period of the debt restructuring. A stay implies that all legal proceedings by creditors are suspended and that the debtor’s assets cannot be attached. In this way, the parties involved in debt restructuring get some breathing space to reorganise debt and to negotiate in good faith, without the distraction of lawsuits. The suspension of obligations prevents creditors from undertaking enforcement measures (e.g. rush to the courthouse or grab race) (Sturzenegger and Zettelmeyer, 2006[69]; Thomas, 2004[70]), especially when asset attachment is not restricted (Schwarcz, 2002[33]). As the stay ensures that no creditor receives payments from the debtor or is allowed to seize assets at the expense of the other creditors, it also contributes to an equitable treatment of the creditors and preserves the final value available to all creditors (Berensmann, 2003[71]).

Most existing insolvency frameworks as well as many proposals foresee a stay on enforcement. In the United States and Hungary, the stay is triggered automatically. In South Africa, municipalities can apply for a stay of all legal proceedings for a maximum of 90 days. In Switzerland, the cantonal bankruptcy authority can temporarily cease debt enforcement, if it does not deteriorate the financial position of the creditors. However, creditors may file for continuation. Apart from that, the activation of a stay may also require the affirmative vote of a (qualified) majority of creditors (IMF, 2002[55]).

The main advantages of the stay are that it facilitates debt restructuring and prevents opportunistic behaviour by single creditors. However, protecting the debtor from creditors’ legal actions may encourage moral hazard. It may also interfere with creditors' rights. Thus, limiting the duration of the stay (like in South-Africa) and giving the creditors a veto right (as in Switzerland) appear reasonable. This may accelerate the restructuring procedure and balance the rights of the debtor and the creditors. Limiting the stay on enforcement to certain types of claims (e.g. non-secured claims) may also be less intrusive from the perspective of contractual rights than a deadlock. Payment to public employees (e.g. teachers, firefighters, police, etc.), suppliers and services could be continued so that public service provision is not impaired (Schwarcz, 2002[33]). In this regard, Bolton and Skeel (2004[59]) advocate a targeted stay applicable solely to asset seizures, so that ordinary litigations (which do not interfere with the restructuring process) can be continued.

The assignment of both the proposal right and the veto right is decisive for the outcome of the debt negotiation. According to Tsebelis (2002[72]), the outcome is likely to be biased towards the party that has the power to present a proposal. Assigning the debtor the proposal right may give priority to maintaining public services. Granting proposal power to the creditors respects creditors’ property rights but might induce collective action problems. In the United States, Chapter 9 gives the debtor the right to propose the debt adjustment plan, while under PROMESA the oversight board has this right. In Hungary, it is the task of the committee appointed by the debtor (and led by the trustee). The South African framework even grants the trustee the right to draft the debt settlement proposal.

To restore balance between the different interests of the debtor and the creditors, it seems reasonable to assign the veto power to a neutral third party. Most frameworks (e.g. United States, Hungary, South Africa) require the confirmation of the debt restructuring plan by the court. In Switzerland, the voting decision of the creditors (proposal right is not defined by the law) has to be approved by the bankruptcy authority. Alternatively, an ad hoc arbitration commission could also perform this task. In some proposals for sovereign debt restructuring a (neutral) ad hoc arbitration body or committee elected by the debtor and creditors shall finally rule on a debt restructuring solution (Raffer, 1990[57]; Paulus, 2002[60]). Anyhow, if an efficient judiciary exists, the restructuring proposal should be confirmed by the court rather than by an administrative body or an ad hoc arbitration committee. A confirmation by the court would increase the binding effect of the proposal for all parties involved. It would also legitimise intervention into property rights especially when debt discharge is agreed and ensure that this is fair and equitable (Waldmeier, 2014[53]; Liu and Waibel, 2008[63]).

Insolvency frameworks may define the voting process and the voting rules to get the creditors’ consent to the debt restructuring proposal. They may state a unanimity rule, a simple majority rule or a qualified majority rule. They may refer to all existing claims or differentiate between certain classes of claims.

In all countries, except South Africa, creditors vote on the debt restructuring proposal. In the United States, the adjustment plan needs to be accepted by half in number and two-thirds in amount of each class of claims that is impaired. Similar voting rules can be found in the Hungarian and Swiss frameworks or are favoured in the proposals for subnational and sovereign debt restructuring (Schwarcz, 2000[58]; 2011[31]). In Colombia, voting on the proposal is less transparent and clear. Different voting rights are assigned to the different classes of creditors e.g. pension fund claimants get an extra 25% voting weight added to the principal of their recognised claim. An agreement becomes binding when it is accepted by an absolute majority of the votes.

It is indispensable to define a clear, transparent and equitable voting process as it speeds up the completion of the restructuring process, reduces the uncertainty of the outcome of insolvency procedures, and respects the creditors’ property rights. Using a simple majority rule in terms of the number of creditors accelerates finding a restructuring solution compared with a qualified majority or unanimity rule. However, it seems reasonable to complement the simple majority rule in terms of numbers of claims by a qualified majority rule in terms of volume. In this way, creditors holding the majority of claims cannot be overruled. Applying a majority rule to each class of voters may also serve to safeguard creditors’ rights.

A majority rule may reduce the risk of the holdout problem compared to an unanimity rule, but it does not eliminate it – especially when a veto right to each class of creditors is provided. Chapter 9 includes a mechanism to tackle the holdout problem which is also favoured by Paulus (2002[60]) and Bolton and Skeel (2004[59]). It provides the court with the so called “cram-down” power: The court can confirm the plan under certain circumstances (e.g. if it contributes to a fair and equitable outcome), even when it is rejected by one class. Then, the adjustment plan becomes binding on a dissenting minority.

Frameworks may differentiate between different types of claims and may define which type of claim may receive preferential treatment. Priority rules may reflect country-specific equity preferences such as protecting the labour force or outcomes of labour bargaining, granting social security benefits and/or maintaining public service levels. These objectives have to be weighed against other objectives such as preserving access to new borrowing, maintaining liquidity and protecting contractual rights. Furthermore, frameworks could either prescribe a detailed or a vague definition of priority of claims. A clear priority order may increase legal certainty for settling competing claims. It may reduce settlement disputes and accelerate the restructuring process, but it may also reduce the incentive to come ex ante to a debt solution with the creditors.

Irrespective of the priority order, frameworks should guarantee that creditors holding the same class of claims are treated equally. This rule is explicitly stipulated in the frameworks of Switzerland, Hungary and the United States. Yet, in the existing frameworks different priority rules can be found. Wages and pension contributions, tax and other government claims get preferential treatment in Hungary and Colombia and are even exempted from debt restructuring in Switzerland. In South Africa, priority is given to secured claims. In Colombia, secured creditors have the option to take the collateral or to include the claim in the restructuring process. Unsecured claims are mostly paid last.

Contrary to the Hungarian and Colombian law, the United States’ Chapter 9 does not define a concrete payment order which provides some degree of flexibility to determine a priority structure. The treatment of secured and unsecured claims is given by the requirement of a “cram-down” that a plan is fair and equitable. Accordingly, holders of secured claims receive at least the value of the securitised property. Those with unsecured claims often lose out (McConnell and Picker, 1993[29]). They only receive “what they reasonably can expect under the circumstances” (Jones Day, 2010[65]).

Different approaches exist for classifying new and senior debt. Under Chapter 9, priority can be given to debtor-in-possession-financing, i.e. new financing obtained for the debtor’s restructuring from the credit and capital market. Without this priority, due to the lacking creditworthiness of the debtor, creditors may not grant fresh capital, which is necessary for maintaining critical government functions. As a result, higher-level governments may be forced to step in as the lender of last resort. Furthermore, the debtor might be induced to play a Ponzi-type game, substituting old liabilities with new ones. However, interim financing which is exempted from debt restructuring or receives preferential treatment should be limited to the amount necessary for fulfilling basic government tasks and to reasonable trade debt needs.

There are several arguments for preferring senior debt to junior debt. Giving priority to senior debt promotes budget discipline. It accounts for the fact that later creditors were better informed about the fiscal situation of the SNG and were better able to price in the probability of default by demanding higher risk premia than earlier creditors (Blankart and Fasten, 2009[48]). Finally, it reduces the risk of debt illusion, i.e. that new debt reduces the asset value of former creditors (Fama and Miller, 1972[73]). Preference for senior debt is for example granted by the so-called absolute priority principle in private American bankruptcy proceedings which may also be applied to United States municipalities. Bolton and Skeel (2004[59]) propose a first-in-time rule according to which unsecured claims should be classified in terms of their emission dates. The older the claim, the higher is the priority.

Insolvency frameworks may stipulate ex ante which kind of assets can be sold and what level of service needs to be maintained. Defining the seizeable assets or essential services may affect municipal services, raise sovereignty concerns and influence financing which implies a trade-off. On the one hand, a municipality has to be left with as many assets as are necessary to fulfil its constitutional tasks. On the other hand, the more “insolvency mass” is available for the creditors, the lower are the ex ante costs of credit financing.

The seizeable assets or essential services can be defined either in detail or more vaguely. With a clear-cut definition or a catalogue of seizeable assets and essential services the outcome is more predictable. A clear definition leaves less room for manipulation than a fuzzy definition where assets may be shifted between different accounts or where non-essential assets may be declared essential. However, it may not be practical, as it reduces the possibilities to adjust to a changing environment.

Definitions of non-seizeable and seizeable assets can be found in the Swiss, South African and Hungarian regulations. In these rules, neither assets that are essential for public service provision nor tax revenue can be seized. A clear definition of essential services is only provided by the Hungarian framework, which lists 27 items.

It may be useful to stipulate an early termination of the insolvency procedure or other sanctions in cases where the SNG or the creditors do not comply with the framework’s rules. Sanctions enforce insolvency rulings and make the agreement binding for the parties involved.

All regulations except the Swiss law foresee an early dismissal of the insolvency procedure or other sanctions when a municipality does not adhere to the rules. In Hungary, sanctions may include fining the mayor for delaying the initiation of the debt adjustment process or dissolving the city council for not finding an agreement within a certain time frame. Even criminal and civil prosecutions can take place (Jókay, 2013[40]). The South African framework provides sanctions (e.g. dissolution of the city council), when the municipality does not adhere to a fiscal recovery plan elaborated during state intervention. In the other frameworks, the debt restructuring plan is declared null and void if the debtor fails to comply with it. The debtor is then burdened with his original debt.

The threat of an early dismissal may facilitate the debt restructuring process. Specifying timeframes, as in Hungary, may push the SNG to find a timely debt solution. Sanctions on missing fiscal adjustment, like in South Africa, accelerate the process of budgetary and fiscal reforms and deter strategic default. However, sanctions or a dismissal may conflict with sovereignty or raise constitutional issues and make it more difficult to maintain public service levels.

Debt restructuring should be accompanied by fiscal adjustment. This may involve expenditure cuts, tax increases and/or the raising of new income sources. In addition, it may involve structural reforms (e.g. enhancing the efficiency of public service provision). As such, fiscal adjustment may serve to rectify fiscal mismanagement, overcome structural problems, and/or mitigate the negative effects stemming from an adverse exogenous shock. It also serves to deter debtors from running into insolvency. Furthermore, fiscal adjustment allows a better distribution of the burden of a debt crisis. It assures that both the creditors and the taxpayers share the burden of the debt restructuring. Nevertheless, the scope of fiscal adjustment is limited. Preserving basic municipal functions precludes deep expenditure cuts. An increase in tax rates may also erode the tax base if citizens and businesses leave the subnational entity (i.e. voting with their feet) (Blankart and Klaiber, 2006[12]).

The existing insolvency regimes contain requirements for some form of fiscal adjustment. Switzerland has included specific fiscal adjustment rules in the insolvency law. In South Africa and Colombia, debt restructuring rules are part of or are complemented by a fiscal adjustment framework. In South Africa, Switzerland and the United States, the approval of insolvency depends on pre-filing efforts of the municipality to adjust the budget and to restore financial health.

The American Chapter 9 framework gives the municipality in bankruptcy the power to assume and reject executory contracts (contracts that are yet to be performed) and unexpired leases. The municipality can suspend burdensome non-debt contractual obligations including collective bargaining agreements, and thus remove substantial budgetary costs stemming from employee payroll compensation and other employee benefits (United States Courts, 2017[64]; de Angelis and Tian, 2013[38]). The rejection of non-feasible contracts may help to facilitate financial recovery, but it may undermine necessary reforms and encourage strategic filing.

Fiscal intervention may contribute to enforce fiscal adjustment. It can be exerted by the court and/or an administrative authority. Fiscal intervention by a (competent and independent) third party may accelerate the fiscal adjustment process and fiscal recovery of the subnational entity. As it deprives political decision makers of financial autonomy, it sanctions the political failure that led to the subnational bankruptcy. Fiscal intervention is even useful from a political economy perspective: third parties can take unpopular decisions more easily without fearing consequences from the electorate.

In South Africa and Switzerland, insolvency frameworks give the higher governmental authority extensive rights to supervise fiscal adjustments and to intervene in subnational policy making. According to the Swiss law, where the municipality is in severe fiscal distress, the bankruptcy authority can mandate a supervisory commission to make decisions on behalf of the municipality about budget restructuring, spending cuts, tax increases, the selling of assets and/or new income sources. In South Africa, a municipal government has to be subject to mandatory fiscal intervention before it can apply for debt restructuring. Then, an administrative authority elaborates a recovery plan to be implemented by the municipality, recommending changes to the budget and revenue raising measures of the municipality.

On the other hand, fiscal intervention by a third party may interfere with sovereignty. Hence, the United States’ Chapter 9 guarantees that state sovereignty is recognised by the courts: day to day activities of the municipality are not subject to court approval. The control of the municipality is explicitly reserved to the states.

Given country-specificities and trade-offs, no one-size-fits-all optimal framework exists. Table 7.2 provides a detailed overview of the different features of insolvency regimes and how they relate to corresponding objectives. In order to maintain essential services and facilitate fiscal adjustment, the framework should provide for a wide definition of non-seizeable assets, sanctions in case of missing adjustments and fiscal intervention by the upper-level government. The two latter features may also serve to deter moral hazard – as well as triggering criteria which apply the “ultima ratio principle”. Beneficial to facilitating debt adjustment are features which grant a temporary stay on enforcement, stipulate a cram-down rule and define a clear and detailed payment order. Creditors’ rights are best protected when triggering criteria are defined restrictively, the veto right is assigned to a neutral third party and a wide range of assets can be seized. Ensuring that constitutional and sovereignty rights are respected calls for strict eligibility criteria as well as a limitation on asset attachment and policy intervention.

Drawing on these features, existing frameworks set different priorities. The Chapter 9 procedure gives more emphasis to facilitating debt adjustment than the frameworks of Hungary, South Africa or Switzerland. In particular, Chapter 9 places more focus on deterring the collective action problem and safeguarding constitutional rights. However, Chapter 9 puts less emphasis on frameworks for safeguarding public services and promoting fiscal adjustment.

Some general conclusions can be drawn from the existing insolvency regimes to develop a rudimentary model framework (Box 7.5). Unlike the country-specific proposals of Waldmaier (2014[53]), Schwarcz (2011[31]) and Skeel (2012[51]), the model proposed here abstracts from compatibility with specific constitutional law. The general features in Box 7.5 can be adapted to fit country-specificities. For example, unitary countries could give more emphasis to the role of administrative authorities (e.g. higher-level governments). Federal countries might follow a more judicial procedure by strengthening the role of the courts. For reasons of constitutionality and sovereignty, it might be necessary to omit or weaken some features that may undercut subnational autonomy.

It is possible that the move towards an insolvency framework may prompt concern among some stakeholders. In response, Box 7.6 proposes several approaches which may facilitate the implementation of insolvency frameworks. Integrating an opt-in or opt-out option or defining a minimalist framework to be further specified by subnational law may respect the sovereignty principle. A gradual development of insolvency frameworks, the definition of transition paths, the provision of central government guarantees, or the establishment of a debt redemption fund may increase acceptance of the framework. Nonetheless, measures that introduce moral hazard or add flexibility may limit the effectiveness of the framework.


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← 1. One recent exception being Brazil’s 2017 Fiscal Recovery Regime (Regime de Recuperação Fiscal), which provides breathing room for heavily indebted states with liquidity problems through a grace period on the debt administered by the central government, and demands fiscal adjustment measures to bring them back to a fiscal sustainable path (Fernandes and Santana, 2018[78]; IMF, 2019[79]).

← 2. Based on the OECD Fiscal Decentralisation database, http://oe.cd/FDdb. OECD averages are unweighted averages. The average is computed using 2019 data for all countries available. The following countries reported data on SNG revenue shares: Australia, Austria, Belgium, Canada, Chile, Colombia, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Israel, Italy, Japan, Korea, Latvia, Lithuania, Luxembourg, Mexico, Netherlands, New Zealand, Norway, Poland, Portugal, Slovak Republic, Slovenia, Spain, Sweden, Switzerland, Turkey, United Kingdom, and United States. The following countries reported data on SNG spending shares: Australia, Austria, Belgium, Canada, Chile, Colombia, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Israel, Italy, Japan, Korea, Latvia, Lithuania, Luxembourg, Mexico, Netherlands, New Zealand, Norway, Poland, Portugal, Slovak Republic, Slovenia, Spain, Sweden, Switzerland, Turkey, United Kingdom and United States.

← 3. responded to

← 4.

← 5.

← 6. A comparison of these sovereign insolvency approaches is provided by Berensmann and Herzberg (2009[80]).

← 7. and

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