Until debt do us part: subnational debt, insolvency, and markets

State and local debt and debt of quasi-public agencies have grown in importance. Three structural trends have contributed to the rising share of subnational finance, including subnational debt, as a share of general public debt. First, decentralization in many countries has given subnational governments (SNGs) certain spending responsibilities, revenue raising authority, and the capacity to incur debt. With sovereign access to financial markets, SNGs are seeking access to these markets as well. Second, rapid urbanization in developing countries requires large-scale infrastructure financing to help absorb influxes of rural populations. Third, the subnational debt market in developing countries has been going through a notable transformation. Private capital has emerged to play an important role in subnational finance, and subnational bonds increasingly compete with traditional bank loans. The 2008-09 global financial crises has had a profound impact on subnational finance across countries, as a result of slowing economic growth, the rising cost of borrowing, and deteriorating primary balances. The impact has been mitigated in various countries by fiscal stimulus, monetary easing, and increasing fiscal transfers. However, looking forward, pressures on subnational finance are likely to continue, from the potentially higher cost of capital, the fragility of global recovery, refinancing risks, and sovereign risks.