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

Published online by Cambridge University Press:  27 December 2018

Kyle Hanniman
Kyle Hanniman*
Affiliation:
Queen’s University, Kingston, Ontario, Canada
*
*Corresponding author: Email: [email protected]
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Abstract

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.

Keywords

fiscal federalismdefault riskmarket-preserving federalismpolitical economy
Type
Articles
Information
British Journal of Political Science , Volume 50 , Issue 4 , October 2020 , pp. 1381 - 1403
Copyright
© Cambridge University Press 2018

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