Does municipal fiscal distress hinder inter-municipal cooperation?

PurposeInter-municipal cooperation (IMC) has been increasingly adopted worldwide to tackle issues of size and cost reduction in the provision of public services. Although the determinants of cooperation among municipalities have been widely investigated in the prior literature, little is known about the link between a municipality's financial health and that of the supra-municipal entity formed under IMC. The purpose of this study is to fill this research gap by analyzing the case of municipal unions (MUs) in Italy.Design/methodology/approachA quantitative approach has been used, applying OLS and quantile regression on financial information and other variables of municipalities and their MUs.FindingsThe study finds that the most important condition of operation for IMC, that is, financial sustainability, is directly linked to the financial health of member municipalities and the functional integration reached with the supra-municipal entity.Originality/valueThe study analyses all MUs in Italy, focusing on the factors affecting their financial sustainability. In doing so, it sheds light on the factors that influence the financial sustainability of second-tier governments, which rely on external funding.

Fiscal Distress of Hungarian Local Governments in the Light of the Debt Consolidation and the Reorganisation of the Municipal System

The consolidation of the debt of the municipalities and the reorganisation of their tasks and funding were significant reforms of the Hungarian public sector. In this study, we examined the differences in the financial parameters of the period of 2005-2008 among the local governments which took part in the debt consolidation and which are remained out. We applied logistic regression on a sample of 230 local governments. The study also aims to examine how the reorganisation of the tasks and funding affects the differences between the two groups. Our results confirm that there were significant differences in their own revenues and operating balance. In the post-consolidation period, we found that the two groups are converged to each other, so the changes in the operation of the local governments reduced the previously existing differences. Besides that, our results show that the local governments of the sample improved their financial conditions, generally.

Analysis of Tail Dependence between Sovereign Debt Distress and Bank Non-Performing Loans

We investigate the tail dependence between sovereign debt distress and bank non-performing loans (NPLs) using a large sample of developed and emerging countries in recent decades. Considering the feedback loop of sovereign debt and bank loan distress, we use three copula models to analyze the asymmetry of tail dependence structure between sovereign debt exposure and bank NPLs. We use the Gaussian copula marginal regression to control the concurrent impact of other macroeconomic variables. We provide evidence that sovereign debt indicates an important determinant of NPLs. We also find that there is tail dependence between sovereign debt distress and bank NPLs, whereas the tail dependence coefficients vary across countries. Our findings shed light on the influence of fiscal distress on bank loan distress and provide immediate implications for the design of macro prudential and financial policy.

Conceptions of Local Economic Development: Comparing Citizen and Local Official Attitudes

This research compares citizen and local official attitudes about local barriers to, and assets that, facilitate local economic health and the underlying factors that lead to local fiscal distress. Using surveys of citizens and local government officials, the research indicates that both groups point to very traditional barriers to local economic growth as being important: lack of large employers, tax rates that are too high, and poor traditional infrastructure. While citizens and officials tend to see local economic distress emanating from the same causes, local officials are more likely to “blame” citizen opposition to attempts to increase revenues and the state for policies that negatively affect local governments. Citizens, on the other hand, are more likely to place blame on their local officials for corruption and mismanagement and for poor decisions regarding public employee pensions. The implications for local economic development policy are discussed.

A Critical Political Economy Approach

In economics literature, competing explanations of debtor compliance have one thing in common, that is, they have so far largely sidestepped overtly social and political questions such as, who benefits from default? Who benefits from repayment? How do different groups assess whether they are likely to lose or win out? One can begin to craft a more nuanced understanding of the deeper dynamics behind the international regime of cross-border contract enforcement only by taking a closer look at the redistributive implications of default and repayment, and the resultant political struggles between different social groups over the appropriate course of action to be taken. This chapter presents the basic theoretical contours of a sociologically informed critical political economy perspective that foregrounds these underlying power differentials, and the related distributional conflicts over who gets to call the shots and who gets to bear the burden of adjustment in times of fiscal distress.

The Sovereign Debt Puzzle

This introductory chapter first sets out the book's purpose, which is to contribute to debates on the power of finance and the consequences of contemporary patterns in international crisis management for social justice and democracy. It does so by revisiting a seemingly simple question whose answer has nonetheless eluded economists for decades: why do so many heavily indebted countries continue to service their external debts even in times of acute fiscal distress? The chapter then presents a brief history of sovereign default followed by discussions of why governments repay their debts, the three enforcement mechanisms of debtor compliance, and consequences for international crisis management.

Are Transfer-Dependent Governments More Creditworthy? Reassessing the Fiscal Federal Foundations of Subnational Default Risk

Many fiscal federal scholars argue, often implicitly, that transfer dependence generally bolsters subnational creditworthiness by signalling a higher likelihood of national bailouts for distressed governments. This article argues that dependence fails to bestow general benefits on local borrowers because it suggests an inability to generate additional revenues in the event of fiscal distress, and because this inability does not, contrary to the expectations of many, necessarily translate into higher bailout expectations. Ultimately it is the nature, not the level, of transfers that affects local creditworthiness, whether through bailout or non-bailout channels. Stable and predictable payments, including robust equalization systems, support local creditworthiness, while volatile and unpredictable transfers do not. The article supports these arguments with a review of documents issued by the major international credit rating agencies and cross-national statistical analyses of bailout probabilities and standalone credit ratings issued by Moody’s Investors Service. It also discusses the implications of the findings for work on the fiscal discipline of subnational governments.