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Preventing Local Government Defaults: No-Bailout Policy and Its Alternatives

In: Local Public Finance

Author

Listed:
  • Maarten Adriaan Allers

    (University of Groningen)

  • Joes Gordon Natris

    (University of Groningen)

Abstract

Fiscal decentralisation introduces the risk that subnational governments may act in a fiscally irresponsible manner in the belief that a higher tier of government will bail them out if they run into trouble. The economic literature, therefore, prescribes a strict no-bailout policy. We survey fiscal rules and fiscal policies concerning subnational governments in 20 European countries and find wide discrepancies, both between the theory and practice and between the rules and actual policies. Countries with a no-bailout rule often do bail out subnational governments, sometimes on a large scale, while countries lacking such a rule sometimes do not, or only sparingly. The fiscally responsible behaviour of subnational governments seems to depend upon a balanced mix of policy measures, notably providing sufficient funding, adequate fiscal supervision, early intervention mechanisms and bailout rules that are sufficiently unattractive. A no-bailout rule is neither necessary nor sufficient.

Suggested Citation

  • Maarten Adriaan Allers & Joes Gordon Natris, 2021. "Preventing Local Government Defaults: No-Bailout Policy and Its Alternatives," Springer Books, in: René Geissler & Gerhard Hammerschmid & Christian Raffer (ed.), Local Public Finance, pages 187-207, Springer.
    • Handle: RePEc:spr:sprchp:978-3-030-67466-3_11
    DOI: 10.1007/978-3-030-67466-3_11
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    Cited by:

    1. Alfonso Mendoza-Velázquez & Heidi J. Smith & Diego Mendoza-Martínez, 2023. "Regional Growth, Debt Thresholds and Subnational Sustainability," Remef - Revista Mexicana de Economía y Finanzas Nueva Época REMEF (The Mexican Journal of Economics and Finance), Instituto Mexicano de Ejecutivos de Finanzas, IMEF, vol. 18(2), pages 1-23, Abril - J.
    2. Emanuele Padovani & Francesco Porcelli & Alberto Zanardi, 2024. "The determinants of the financial distress of Italian municipalities: How much is it due to inadequate resources?," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 31(6), pages 1494-1533, December.
    3. Alfonso Mendoza-Velazquez & Heidi J. Smith & Diego Mendoza-Martinez, 2022. "Subnational Regional Growth, Debt Thresholds and Sustainability," Working Paper Series Sobre México 2022001, Sobre México. Temas en economía.

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