Local debts, international authority : rating agencies' emergence in regulating subnational debt

• Main Author: Sathe, Ommeed S. (Ommeed Sanjay)
• Other Authors: Balakrishnan Rajagopal.
• Format: Others
• Language: English
• Published: Massachusetts Institute of Technology 2007
• Subjects: Urban Studies and Planning.
• Online Access: http://hdl.handle.net/1721.1/37469

Thesis (M.C.P.)--Massachusetts Institute of Technology, Dept. of Urban Studies and Planning, 2006. === Includes bibliographical references (p. 95-99). === This thesis explores the growth of subnational debt ("SND") and the different regulatory responses to this debt. It focuses on the recent emergence of credit rating agencies (e.g. Standard & Poor's, Moody's and Fitch) as an alternative regulatory mechanism, which has the potential to stabilize these markets, improve risk pricing, and alter traditional conceptions of local governance. The first chapter traces SND's long legacy of debt defaults, federal bailouts, and improperly priced risk; as well as the profound benefits that SND can provide to local governments, particularly as a means of resisting the siren song of privatization. Unfortunately, it finds that conventional strategies for regulating SND - including federal oversight, financial rules and market discipline - have not properly balanced these trade offs and have left lingering moral hazards, overly restricted debt markets, and a legacy of mispricing. The second chapter examines the emergence of debt rating agencies in Mexico as a possible alternative. It traces their growth, particularly the role of domestic and international agreements, their methodology, and their historic accuracy. It finds that they should improve debt pricing and obviate moral hazards when compared to existing regulatory interventions. === (cont.) However, these significant benefits come with profound implications on local governance and decentralization. The third chapter investigates rating agencies infringement on traditional local autonomy as well as the more subtle ways in which these bodies can actually improve local deliberation by enhancing transparency and formality. The thesis argues further that any restrictions are outweighed by the benefits from stabilizing SND markets and replacing more onerous regimes. The thesis also suggests that the agencies' view of governance actually fits in with broader international approaches and is part of a broader movement towards international local government law. The paper concludes by considering potential regulation to improve agencies' performance further. === by Ommeed S. Sathe. === M.C.P.