Foundations of subnational public debt management: theories, concepts and policy lessons

Modern public financial management must include subnational debt management as increasing numbers of countries are working to incorporate debt into their local governments’ balance sheets. Although there may be few macroeconomic challenges by offering credit at the subnational level, analysts and public managers need to hedge themselves from political, economic or financial risks created when cities default, without bankruptcy laws inducing obligatory soft bailouts. Central governments (federal and unitary) must manage balance sheets within their intergovernmental relations. While there are market-based opportunities such as credit ratings, government intervention is key to ensuring success through federal laws, fiscal rules, regulation of the banking and financial sector, and credit enhancements through federal guarantees. This chapter reviews basic concepts of subnational debt management and presents possible pitfalls for when rules fail, fiscal imbalances overrun federalist systems, or credit ratings become unnecessary. Key concepts discussed include federal financial regulation, debt management, credit ratings, intergovernmental relations and credit guarantees using examples from Mexico, Korea, the United States and China.