Working paper from 2020
Abstract
DevTech Systems explores recent restructuring experiences at the subnational level and the incentives of stakeholders. The study identifies structural impediments to a first-best restructuring outcome stemming from varying legal, regulatory and political frameworks currently governing restructuring
Introduction
While sovereign default has been studied extensively, very little attention has been paid to U.S. municipal default (with the exception of some work regarding capital structure). There are significant similarities between sovereign and U.S. municipal default: certain subnational governments resemble sovereigns in their size and other characteristics, and the restructuring regimes are often similar.
Studies of sovereign default have focused on the absence of a bankruptcy framework. To this end, a debate arose in the early 2000s as to whether collective action clauses or unanimous action clauses are sufficient and whether “bailouts” from the International Monetary Fund promote moral hazard on the part of creditors (Jeanne and Zettelmeyer 2001; Dell’Ariccia et al. 2002). This debate remains without resolution. More recently, an energetic policy debate has proposed that the lack of bankruptcy regimes is the cause of many of the sovereign bankruptcy issues, and because of sovereign immunity in the international space, issues such as those arising in the restructuring of Argentina could be avoided or significantly minimized with a proper bankruptcy regime. This, of course, begs the question of cases like Detroit, Jefferson County, Alabama, and other long and costly municipal restructurings that failed in the United States, despite being undertaken in the context of an “organized” bankruptcy regime that has existed for over a century.
Read the full paper here: https://devtechsys.com/wp-content/uploads/2026/10/SGE_Insights-Article-2.pdf
