A New Model For Market Based Regulation Of Subnational Borrowing

To bring fiscal discipline to state and municipal governments, Mexico's federal government has established a two-pillar framework that explicitly renounces federal bail-outs and establishes a Basel - consistent link between the capital-risk weighting of bank loans to subnational governments and the borrower's credit rating. Whether the framework succeeds will depend partly on market assessments of the government's commitment to enforce bank capital rules and refrain from bailing out defaulting subnational governments.

To bring fiscal discipline to state and municipal governments, Mexico's federal government has established a two-pillar framework that explicitly renounces federal bail-outs and establishes a Basel-consistent link between the capital-risk weighting of bank loans to subnational governments and the borrower`s credit rating. Whether the framework succeeds will depend partly on market assessments of the government's commitment to enforce bank capital rules and refrain from bailing out defaulting subnational governments.Faced with weak subnational finances that pose a risk to macroeconomic stability, Mexico's federal government in April 2000 established an innovative incentive framework to bring fiscal discipline to state and municipal governments.That framework is based on two pillars: an explicit renunciation of federal bail-outs and a Basel-consistent link between the capital-risk weighting of bank loans to subnational governments and the borrower`s credit rating.In theory, this new regulatory arrangement should reduce moral hazard among banks and their state and municipal clients; differentiate interest rates on the basis of the borrowers' creditworthiness; and elicit a strong demand for institutional development at the subnational level.But its success will depend on three factors critical to implementation:middot; Whether markets find the federal commitment not to bail out defaulting subnational governments credible.middot; Whether subnational governments have access to financing other than bank loans.middot; How well bank capital rules are enforced.This paper - a product of the Mexico - Country Department and Poverty Reduction and Economic Management Sector Unit, Latin America and the Caribbean Region - is part of a larger effort in the region to understand the subnational underpinnings of sustainable, national economic framework. The authors may be contacted at [email protected], [email protected], or [email protected].

This paper presents various models of control with advantages and disadvantages, the balance of which would make it more or less suitable to a particular country's circumstances. As these circumstances evolve—as fiscal and macro imbalances improve or worsen—the preferable model may change over time. Although appealing in principle, sole reliance on market discipline for government borrowing is unlikely to be appropriate in many circumstances. This is so, because one or more of the conditions for its effective working frequently are not realized in each particular country. The increasing worldwide trend toward devolution of spending and revenue-raising responsibilities to subnational governments seems likely to come into growing conflict with systems of administrative controls by the central government on subnational borrowing. Rules-based approaches to debt control would appear preferable, in terms of transparency and certainty, to administrative controls and also to statutory limits defined in the context of the annual budget process, the outcome of which may be unduly influenced by short-term political bargaining.

A comprehensive explanation of information institutions as they relate to the success of subnational capital markets Global trends in decentralization and the growing role of world cities have increased the importance of infrastructure development. But with competing incentives of suppliers and borrowers of capital in the web of institutional governance arrangements, information problems are inevitable. Understanding how local choices affect these larger trends can help national and city actors not just avoid being paralyzed by information problems, but actually improve information resolution. In this book Christine R. Martell, Tima Moldogaziev, Salvador Espinosa argue that capital markets are a viable financing alternative for subnational borrowers. They explain how subnational governments can manage their fiscal and debt choices to leverage capital markets to finance efficient, effective, and equitable infrastructure provision. The book builds on previous work by exploring the role of information institutions as they relate to the success of subnational capital markets and by advancing options for subnational government to gain agency as active market participants. With broad geographic coverage, Information Resolution and Subnational Capital Markets answers core questions: How does information permeate the landscape and outcomes of subnational government borrowing, both at the aggregate national level and at the city level? What measures and mechanisms can national and subnational governments take to resolve information problems? And, what can cities do to enhance their agency vis-à-vis central governments and capital market actors, so that they can command a voice in managing internal and external sources of capital financing?

In the aftermath of the global financial crisis, policymakers around the world are focusing once again on government debt sustainability. In China, subnational government debt is an important part of total government debt, and therefore deserves the attention that policymakers have paid to the topic. Subnational debt has played an important role in financing China’s impressive infrastructure that is the envy of the world. It was instrumental in the economic stimulus that China so effectively staged after the global financial crisis, through which China maintained high levels of economic activity. This e-book reports on the proceedings of a joint P.R. China Ministry of Finance-World Bank international workshop on Subnational Debt Management held in Nanning, China in October 2015. Looking at both the Chinese perspective on this subject of subnational debt and selected international experiences along with experts’ perspectives together, we provide a syntheses of key issues which China needs to consider going forward in subnational debt management and restructuring. The roundtable discussion among international and Chinese experts oat the workshop on the way forward for China provided an illuminating discussion which highlighted the need for a transitional strategy for subnational financing, and the need to use debt sustainability as a guide for transition, which will involve tough fiscal policy choices and restructuring of the subnational economies concerned (not just debt restructuring alone). The urgency of strengthening budget and debt management prudent public investment prioritization and management in the subnational context cannot be emphasized enough.

When households face the possibility of borrowing constraints in bad times, favorable movements in the permanent component of the terms of trade may lead to higher rates of private savings.

A distinctive feature of urbanization in the last 50 years is the expansion of urban populations and built development well beyond what was earlier conceived as the city limit, resulting in metropolitan areas. This is challenging the relevance of traditional municipal boundaries, and by extension, traditional governing structures and institutions. "Steering the Metropolis: Metropolitan Governance for Sustainable Urban Development,” encompasses the reflections of thought and practice leaders on the underlying premises for governing metropolitan space, sectoral adaptations of those premises, and dynamic applications in a wide variety of contexts. Those reflections are structured into three sections. Section 1 discusses the conceptual underpinnings of metropolitan governance, analyzing why political, technical, and administrative arrangements at this level of government are needed. Section 2 deepens the discussion by addressing specific sectoral themes of mobility, land use planning, environmental management, and economic production, as well as crosscutting topics of metropolitan governance finance, and monitoring and evaluation. Section 3 tests the concepts and their sectoral adaptations against the practice, with cases from Africa, America, Asia, and Europe.

As developing countries build up their capacity to regulate privatized infrastructure monopolies, cost models are likely to prove increasingly important in determining the efficient cost of providing a service to a certain area or type of customer. But cost models require reliable information, which is often scarce in developing countries. Census data and the location of wire services together may help provide the minimum information a regulator needs to implement a cost proxy model, a promising regulatory tool for assessing the efficient cost of providing a utility service.