Bankruptcy, Backwards: The Problem of Quasi-Sovereign Debt

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This Feature considers the debts of quasi-sovereign states in light of proposals to let them file for bankruptcy protection. States that have ceded some but not all sovereign prerogatives to a central government face distinct challenges as debtors. It is unhelpful to analyze these challenges mainly through the bankruptcy lens. State bankruptcy posits an institutional fix for a problem that remains theoretically undefined and empirically contested. I suggest a way of mapping the problem that does not work back from a solution. I highlight the implications of sovereign immunity, immortality, concurrent authority, macroeconomic policy, and democratic accountability for quasi-sovereign debt management. Bankruptcy centers on coordination failures and contractual liabilities. Neither is especially salient in quasi-sovereign debt. Along with default, fiscal transfers, and ad-hoc renegotiation, bankruptcy is one of several paths to reduce public debt overhang, but not necessarily the best path to state rehabilitation. It holds no special advantage against moral hazard from fiscal federalism and sovereign immunity. Even so, recent bankruptcy proposals have started a useful conversation joining previously disparate scholarship about credit market institutions, sovereign debt, fiscal federalism, and local government. The conversation should refocus on the problem of quasi-sovereign debt.