POVERTY THE WORLD BANK REDUCTION AND ECONOMIC MANAGEMENT NETWORK (PREM) Economic Premise MAY 2010 · Number 13 54507 Subnational Debt Finance and the Global Financial Crisis Otaviano Canuto and Lili Liu This note focuses on the impact of the global financial crisis on subnational debt financing.1 We approach the following questions: Why is subnational debt financing important? What are the impacts of the crisis on the fiscal balance and financing cost of subnational governments (SNGs)? What explains the variations across countries in the ability of SNGs to proactively address the threat of fiscal deterioration? And, equally important, what are the long-term structural challenges facing SNGs in sustainable financing of infrastructure and social services? Rising Importance of Subnational access to these markets as well, particularly given the rising Debt Finance regional and subnational political power that is a driving force in decentralization. State and local debt and debt of quasi-public agencies have Second, the unprecedented scale of urbanization in de- been growing in importance. In Brazil, subnational debt ac- veloping countries requires large-scale urban infrastructure counts for about 30 percent of total public sector net debt. financing to help absorb massive influxes of rural popula- The debt of Indian states is about 27 percent of GDP (the tions. Borrowing enables SNGs to capture the benefits of number would be higher if debt on the balance sheets of major capital investments immediately, rather than waiting companies such as power and water, which are wholly or until sufficient savings from current income can be accumu- largely owned by the states, is included). The rising share of lated to finance them. Infrastructure investments benefit fu- subnational finance in consolidated public finance is not lim- ture generations who therefore should also bear the cost. ited to federal countries. In France, SNGs now account for Subnational borrowing finances infrastructure more equi- more than 70 percent of public investment. Even in coun- tably across multigenerational users of infrastructure services tries where varying degrees of fiscal decentralization have because the maturity of debt can match the economic life been recent, SNGs account for an increasing share of public of the assets that the debt is financing. Infrastructure services investments--for example, approximately 50 percent in In- thus can be paid for by the beneficiaries of the services. donesia and Turkey.2 Third, the subnational debt market in developing coun- Three structural trends have contributed to the rising tries has been going through a notable transformation. Pri- share of subnational finance including SNG debt as a share vate capital has emerged to play an important role in of general public debt. First, decentralization in many coun- subnational finance in countries such as Poland, Romania, tries has given SNGs certain spending responsibilities, rev- and the Russian Federation. Subnational bonds increasingly enue-raising power, and the capacity to incur debt. With compete with traditional bank loans. Notwithstanding the sovereign access to financial markets, SNGs are pushing for temporary disruption of the subnational credit markets dur - 1 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK www.worldbank.org/economicpremise ing the crisis, the trend of more diversified subnational credit Figure 1. Fiscal Balance as a Share of GDP, 2005­09 markets is expected to continue. SNGs or their entities in a. For SNGs in the BRIC countries various countries have already issued bond instruments (for 1.5 example, in China, Colombia, India, Mexico, Poland, Russia, 1.0 and South Africa). More countries are considering policy 0.5 frameworks for facilitating subnational debt market devel- share of GDP (%) 0 opment (for example, Indonesia), whereas other countries ­0.5 are allowing selected subnational entities to pilot-test trans- ­1.0 action and capacity-building activities to the same effect (for ­1.5 example, Peru). ­2.0 ­2.5 Impact of the Financial Crisis on Fiscal ­3.0 Balance ­3.5 2005 2006 2007 2008 2009 The global financial crisis has had a profound impact on sub- year national finance across countries. Slower or negative national Brazil India and regional economic growth has generally reduced the China Russian Federation SNGs' own revenues; the exact impact is influenced by the Sources: Government Web sites; World Bank country teams; Center for revenue structure of the SNG. Subnational government en- Fiscal Policy (Russia). tities with strong dependence on revenues from highly cycli- Note: Fiscal data are aggregated over all SNGs (for example, states, munic- cal economic activities such as housing and commodity ipalities) in each country, except India (where data are for states). Rev- enues may include one-off receipts, such as privatization proceeds. exports will have experienced more negative impact than will the SNGs that have more stable revenue sources such as property taxes based on delayed assessment. SNGs relying b. For SNGs in selected countries heavily on sales, value-added, and income taxes also have ex- 1.5 perienced reduced revenue buoyancy. Fiscal transfers that 1.0 are based on formulas with a time lag will suffer less imme- 0.5 diate impact, although the pressures are only being delayed. share of GDP (%) 0 The deterioration in primary balance is driven by declin- ­0.5 ing revenues combined with expenditure rigidity or contin- ­1.0 uing expenditures. In general, countries' fiscal needs are ­1.5 rising but fiscal space is narrowing, resulting in deteriorating ­2.0 fiscal positions across regions and tiers of the government. ­2.5 Australia France Figure 1 highlights trends of fiscal balance as a share of ­3.0 Canada Spain GDP from 2005 to 2009 in the BRIC countries and in four ­3.5 advanced economies. The rising fiscal deficit--particularly 2005 2006 2007 2008 2009 from 2008 to 2009--happened across all these countries ex- year cept Brazil, where the improvement in 2009 was largely to Sources: Government Web sites; Fitch Ratings (2010). the result of a fall in interest payments as a share of GDP Note: Fiscal data are aggregated over all SNGs (for example, states, (from 1.85 percent in 2008 to 0.47 percent the following municipalities) in each country. Revenues may include one-off receipts, such as privatization proceeds. year). This decline is linked to deflation in the General Price Index (that is, the IGP), which indexes state debts with the federal government. All major rating agencies viewed the impact of the eco- percent of the actions were downward for Western Europe nomic downturn on the credit qualities of SNGs as signifi- and Commonwealth of Independent States/Central and cant because of declines in the tax base, expenditure Eastern Europe countries, and 13 percent were downward pressures or rigidities, and increasing and more expensive in Asia Pacific. There was a general shift toward negative out- debt (Fitch Ratings 2009; Moody's Investor Service 2010; looks for 2009 in the Fitch ratings of European SNGs, and S&P 2010). From October 2008 to January 2010, Moody's the downward pressure is expected to continue into 2010. rating actions affected 72 SNGs, or 24 percent of the rated Similarly, S&P's negative rating actions for European SNGs universe, outside the United States. Ninety-six percent of largely exceeded positive ones in 2009, and the trend is the actions were in a downward direction. For example, 31 likely to continue in 2010. 2 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK www.worldbank.org/economicpremise Impact of the Financial Crisis on the Cost Figure 3. Global Subnational Bond Issuance, 2000­10Q1 (Excluding of Capital the United States) 350 Liquidity squeeze and lower risk appetite generally led to 300 US$ billions equivalent higher financial costs at the height of the crisis, as measured by the cost of subsovereign bond issuances3; however, the cost 250 of financing has declined since mid-2009. As illustrated in fig- 200 ure 2a, yield spread for subnational bond issuance steadily in- creased from 2008Q1 to 2009Q2, whereas maturity exhibited 150 a generally declining trend from 2007Q3 to 2009Q1.4 Further 100 decomposing yield spread, the rising spread was driven mainly 50 by the rising spread of bonds with maturity of less than seven years; and the impact on maturity of seven years or longer has 0 not been as significant (figure 2b). However, the share of sub- 00 01 02 03 04 05 06 07 08 20 9 Q1 0 20 20 20 20 20 20 20 20 20 20 10 national bonds with maturity of seven years or more declined from 60 percent in 2007 to 41 percent in 2009. year Source: DCM Analytics. Figure 2. Quarterly Yield Spread and Maturity for Subnational Bonds Issuance, 2007­10 (Excluding the United States) Bank loans have long dominated SNG debt financing in a. Yield spread and maturity many countries (unlike the United States, where SNG debt 70 12 financing has relied on the capital market). However, as 60 11 shown by figure 3, SNG bond issuance outside the United number of years basis points 50 10 States has increased since the onset of the global crisis. Various 40 9 countries have been exploring capital markets for mobilizing 30 8 financing during the crisis period. The United States remains 20 7 10 6 the largest SNG bond market, with annual issuance of about 0 5 $400 billion. The following top five countries are Germany, Japan, Canada, China, and Spain; together, they account for 20 Q3 20 Q4 20 Q1 20 Q2 20 Q3 20 Q4 20 Q1 20 Q2 20 Q4 20 Q1 20 Q2 20 Q3 Q1 08 09 07 07 07 07 08 08 08 09 09 09 10 about 85 percent of about $308 billion global SNG bond is- 20 quarter suance (excluding the United States) in 2009 (figure 4). There are significant variations in the access to and cost spread maturity of SNG debt financing across and within countries. With a Source: DCM Analytics. deep and competitive capital market in the United States, Note: Thirty percent of bond issuances have yield spreads recorded. the cost of borrowing is directly related to the creditworthi- ness of SNGs. As shown by figure 5, the cost of borrowing b. Yield spread at different maturities for 10-year U.S. municipal general obligation bonds is the 100 lowest for AAA-rated SNG borrowers; each notch down in 80 ratings progressively increases the cost of borrowing, with basis points 60 BBB-rated SNGs bearing higher costs than better-rated ones. 40 With imperfect financial markets in developing countries 20 and capital controls in some countries, the cost structure 0 may not be related to creditworthiness, because of factors ­20 such as subsidized policy lending, monopoly supply by pub- lic banks, and relaxed credit conditions of stimulus packages. 20 1 20 2 20 3 20 4 20 1 20 2 20 3 20 4 20 1 20 2 20 3 20 4 Q1 Q Q Q Q Q Q Q Q Q Q Q Q 07 07 07 07 08 08 08 08 09 09 09 09 10 20 Countercyclical Macroeconomic Policies quarter and SNGs < 3 years 3­7 years 7 years Source: DCM Analytics. To counter the global financial crisis, countries have launched Note: Maturity of three to seven years means those issuances with maturity countercyclical macroeconomic policies. The ability of greater than or equal to three years but less than seven years. Thirty per- cent of bond issuances have yield spread recorded. SNGs to cushion the impact of the crisis depends on a num- 3 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK www.worldbank.org/economicpremise Figure 4. Top Five Countries in Issuing Subnational Bonds, 2000­09 Figure 5. Yield Spread of 10-Year U.S. Municipal General Obligation (Excluding the United States) Bonds, 2007­10Q1 80 100 400 70 95 300 US$ billions equivalent basis points 200 60 90 100 50 85 percent 0 40 80 ­100 30 75 ­200 20 1 20 2 20 3 20 4 20 1 20 2 20 3 20 4 20 1 20 2 20 3 20 4 Q1 20 70 Q Q Q Q Q Q Q Q Q Q Q Q 07 07 07 07 08 08 08 08 09 09 09 09 10 20 10 65 quarter 0 60 00 01 02 03 04 05 06 07 08 09 AAA AA+ A+ BBB 20 20 20 20 20 20 20 20 20 20 Source: Bloomberg. year Spain China Germany Canada Japan share of top five issuers of the sovereign (figure 6). A country's macroeconomic man- Source: DCM Analytics. agement and countrywide risks affect not only the broader economic, fiscal, and financial conditions under which an SNG operates; they also place restrictions on an SNG's abil- ber of factors, with sovereign macroeconomic fundamentals ity to raise funds. The national government typically has a being a dominant factor. wide range of constitutional powers giving it first claim over Major international rating agencies (Fitch, Moody's, and the country's foreign reserves and other resources. Thus, in a S&P) cap subsovereign credit ratings within the sovereign financial crisis, the national government would likely be able credit ratings; and rarely do subsovereign ratings exceed that to fulfill its external or domestic debt obligations ahead of Figure 6. Correlation between Sovereign and Subsovereign Ratings of European Countries Austria AAA G G G G G G G France AA+ G G G G G Germany Norway AA Sweden AA­ Belgium Switzerland Spain A+ G G G G G G Italy United Kingdom A G Portugal sovereign rating A­ Poland G G Czech Rep. BBB+ BBB G G G G G G G G Bulgaria Croatia BBB­ G Russian Fed. BB+ G BB Hungary G G BB­ Romania B+ B Latvia Turkey B­ FYR Macedonia CCC+ G Ukraine CCC CCC+ B­ B B+ BB­ BB BB+ BBB­ BBB BBB+ A­ A A+ AA­ AA AA+ AAA subsovereign rating Source: Standard & Poor's, http://www.standardandpoors.com. Note: The sample size is 141 subsovereign governments from 22 European countries. One dot could represent multiple subsovereigns because many of them share the same sovereign and subsovereign ratings. The only subsovereigns whose ratings exceed its sovereign rating are the Autonomous Commu- nity of Basque Country and Navarre of Spain (the dot below the 45° line). Ratings used are as of February 23, 2010. 4 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK www.worldbank.org/economicpremise the SNG. The rating "ceiling" relationship applies less with a large fiscal space can afford increased fiscal transfers strongly to domestic currency debt instruments. Even in cases to SNGs to reduce borrowing needs or to continue capital where the SNG possesses foreign currency reserves that are spending during recession. out of reach of the national government, the latter neverthe- The ability of SNGs to cushion the impact of crisis is less could impose nationwide capital or exchange controls to framed by the larger national-level response, and fiscally strong restrict capital outflows and thereby disallow the SNG to SNGs such as coastal regions in China also have responded repay its foreign debts. In short, the sovereign is unlikely to forcefully. Box 1 summarizes selected country highlights. default before any SNG does so. Macroeconomic fundamentals affect subsovereign fi- Regulatory Frameworks for Subnational Debt nance mainly through key variables that impact subnational Financing fiscal sustainability. They affect real interest rates (adjusting for inflation and currency movement) and thus the base cost Following the 1990s when subnational fiscal stress or debt of borrowing; at the same time, a subnational's own fiscal crises contributed to macroeconomic deterioration in major position and economic growth affect the spread over the developing countries (such as Argentina, Brazil, India, and base cost structure. Even when subnationals cannot borrow Russia), SNG finance has been substantially strengthened directly from foreign markets, macroeconomic shocks and across various developing countries. SNGs there had stronger currency volatility affect the cost of borrowing by SNGs fiscal and liquidity positions when the current global crisis through real interest rate channels. A central government broke out, thanks to extensive fiscal consolidation taking Box 1. Fiscal Stimulus Relating to SNGs: Selected Country Highlights Brazil: The three-year Programs of Fiscal Adjustments between India: The central government allowed the states to raise addi- the National Treasury and the 27 states adjusted the primary tional market borrowings, thus increasing the limit of gross fiscal balances and indebtedness targets and broadened the fiscal deficit to 3.5 percent of gross state domestic product in fiscal space for new borrowing. Through its development bank, the fed- 2008/09, and to 4.0 percent in fiscal 2009/10. The consoli- eral government created a credit line for SNGs that had suffered dated expenditure of states rose by 25.0 percent during fiscal loss of federal transfers. Given that some states were not in com- 2008/09 (revised estimate), compared with 14.8 percent during pliance with the requirements of fiscal responsibility legislation, fiscal 2007/08 (accounts). A few states have announced their this operation is considered to be exceptional and allows all own dedicated fiscal stimulus packages, and some states have states to contract the credit operation. announced certain tax exemptions/reductions. China: The country launched a large stimulus package centered Russian Federation: The federal government increased the amount on infrastructure spending, combined with increases in transfers, of financial aid to SNGs by 45 percent from the amount initially consumer subsidies, and tax cuts. A significant part of the pack- budgeted for 2009, largely offsetting the revenue fall for SNGs. age supports SNG infrastructure and social spending, with SNG Therefore, budget revenues of most SNGs are likely to be close cofinancing partly supported by provincial bonds totaling Y 200 to 2008 levels. Less-developed regions, which are more depend- billion ($30 billion). The central government issued the bonds ent on transfers, appear to be less affected by the crisis. From on behalf of SNGs as a transitional step (debt will be booked on the budget, the federal government also provided SNGs with low- provincial accounts), taking advantage of the sovereign bond ex- cost loans having three-year maturity. perience and cost advantage. Provinces and municipalities with United States: The American Recovery and Reinvestment Act of fiscal space also have introduced their own fiscal packages. 2009 provided nearly $135 billion in emergency funding, help- France: The central government reduced the delay in refunding ing states avoid draconian cuts in services. With $87 billion in value-added tax to SNGs, enabling them to maintain capital ex- additional Medicaid funding via increased federal medical assis- penditures in 2009 above the 2004­07 average. The expected tance percentage rates and $48 billion as part of the State Fiscal value-added tax refund payments in 2009 totaled more than 4 Stabilization Fund, states were able to maintain critical funding billion, equivalent to 8 percent of SNG capital expenditures in for social services. Through fiscal 2010, states will have spent 2009. Overall net borrowing by French SNGs increased by 5.1 $150 billion in recovery act funds. States have expenditure flex- billion in 2009, while total outstanding debt as a share of GDP ibility, revenue power, and balanced-budget requirements. increased by 4 percent over 2008; but debt accounts for only Sources: Fitch Ratings (2009); government Web sites; NGA/NASBO 4.2 years of overall SNG current balance. (2009); World Bank country teams. 5 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK www.worldbank.org/economicpremise place prior to the crisis in countries such as Brazil, India, government to raise funds--even if it operates well below Mexico, and Russia. In Brazil, SNGs' net debt as a percent of its own debt limit. GDP decreased from 18 percent in 2003 to 14 percent in 2007. In India, the fiscal deficit of states declined from 4.0 Long-Term Structural Issues percent of GDP on average in 2000­05 to 1.5 percent in 2007­08; and states achieved positive operating balances. In Looking beyond the crisis and stabilization, there are long- countries such as Peru and Poland, the governments have em- term structural issues with respect to SNG debt finance in phasized the importance of fiscal sustainability at the start developing countries. Rapid urbanization, with unprece- of decentralization. dented rural-to-urban migration, will continue to demand A core part of the regulatory frameworks is placing limits massive urban infrastructure investments--investments that on key fiscal variables, such as fiscal deficit, primary deficit, largely have been decentralized to SNGs in many countries. debt service ratios, and guarantees. Most frameworks also re- Developing countries invest an annual average of 3­4 per- quire balancing the operating budget. The fiscal and debt cent of GDP on infrastructure, well short of what is consid- limitations imposed on SNGs, either by their national gov- ered to be required (7­8 percent). The scale and the ernments or by the SNGs themselves, are not limited to de- sustainability of infrastructure financing will critically de- veloping countries (box 2). Most states in the United States pend on SNG fiscal sustainability. have constitutional provisions on debt limitations. Similarly, The sovereign's macroeconomic fundamentals will con- France has a strong framework regulating SNG fiscal ac- tinue to be vital to the fiscal sustainability of SNGs. With counts. Many states/provinces in Australia and Canada have the gradual withdrawal of fiscal stimulus packages and the their own fiscal responsibility legislation. ending of monetary easing, pressures on SNGs' fiscal space Because the financial market and rating agencies evaluate could increase through various channels, such as reduced fis- combined public debt (national government and SNGs), cal transfers and higher borrowing costs. It is all the more debt financing limits for SNGs can be subordinate to the important that countries continue to pursue structural re- debt space of national governments. If the national govern- forms to sustain economic growth and develop efficient fi- ment runs a high fiscal deficit and accumulates a large debt nancial markets. stock, this could further limit the ability of a subnational Consolidating public finance through higher expenditure efficiency and structural reforms in the taxation systems for both national and subnational governments will become im- portant to counter the negative impact of stimulus with- drawals. Intergovernmental fiscal systems also will need to Box 2. Regulating Subnational Debt: Country Examples grant subnationals a certain degree of fiscal autonomy, in- · Brazil: Fiscal Responsibility Law (2000) cluding making the budget process less rigid and allowing subnationals taxation power at the margin; this helps make · Colombia: Law 358 (1997); Law 617 (2000); Fiscal SNGs more resilient and flexible in responding to crises. Transparency and Responsibility Law (2003) Whereas significant progress has been made in establish- · France: various borrowing regulations and balanced ing ex ante fiscal rules for subnationals in various countries budget rules to reduce default risks, newly decentralizing countries will · India: states' Fiscal Responsibility and Budget Man- need to develop regulatory frameworks for subnational debt agement Acts, following the 12th Finance Commission instruments before opening up SNG access to financial mar- · Mexico: new subnational borrowing framework in kets. More also needs to be done in developing a robust ex 2000 post insolvency system for debt restructuring in the case of · Peru: Fiscal Responsibility and Transparency Law subnational defaults. A sound insolvency system reduces (amended 2003); General Debt Law (2005) moral hazard of free-riding on common resources by indi- · Poland: Public Finance Law (1998, 2005) vidual SNGs and sends signals to financial markets about · South Africa: Municipal Finance Management Act pricing risks and returns. (2003) Many SNGs have created special-purpose vehicles to un- dertake infrastructure investments, often in partnership with · Turkey: various regulations since the early 2000s private financiers and operators. Such vehicles can play an im- · United States: state regulations (for example, limits portant role in developing infrastructure networks that cut on deficit financing) across the boundaries of subnational administrations. But the Sources: Liu and Waibel (2009); research by the authors. special-purpose vehicle operations must be within a transpar- ent governance and financial structure to ensure that they do 6 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK www.worldbank.org/economicpremise not become a means of circumventing borrowing limits, and 3. It is difficult to obtain comprehensive data on the cost that they do not become contingent liabilities of their creators. and structure of bank loans to SNGs. Accessing financial markets can be a challenge for smaller 4. DCM Analytics is the data source for all figures in this SNGs or those in less-developed regions. For the former, de- section. Data coverage for bond issuances with maturity less veloping models of pooled finance can reduce financing cost, than three years is incomplete. Data are bonds issued by as shown by experiences in such countries as Italy and the SNGs, and the data for China and India also include bond United States. For the latter, fiscal transfers will continue to issuances by entities largely or wholly owned by an SNG play an important role in basic provision of services. (for example, a utility company). References to U.S. subna- Another significant fiscal risk comes from land financing tional bond issuance in this section include bond issuance of infrastructure, with land and other hard assets serving as by special-purpose vehicles created by an SNG. collateral for debt instruments such as bank loans. The up- swing in the value of hard assets in economic boom times About the Authors can lead to excessive borrowing; and the volatility of land and real estate markets creates risks for nonperforming loans, Otaviano Canuto is the vice president and head of the Poverty which can become a liability of the national government and Reduction and Economic Management (PREM) Network; and create macroeconomic risks. Lili Liu is a lead economist with the Economic Policy and Debt The global financial crisis reinforces the importance of Department, PREM Network, World Bank, Washington, DC. managing refinancing and liquidity risks. SNGs, like their na- tional governments, need to strengthen capacity to manage Bibliography structural risks of debt profiles with respect to maturity mix, Ianchovichina, Elena, Lili Liu, and Mohan Nagarajan. 2007. "Subnational real interest rates, currency mix (if they are allowed to bor- Fiscal Sustainability Analysis: What Can We Learn from Tamil Nadu?" row in foreign markets), and liquidity. Managing such risks Economic and Political Weekly 42 (52): 111­19. becomes more important given the uncertainty of sovereign Fitch Ratings. 2009. "European Local and Regional Government Outlook risks and sustained global recovery. Developing countries also 2010." New York. would benefit by learning from the financial disasters that ------. 2010. "Spanish Autonomous Communities' 2010 Budget: Deficit to Grow Further.". Fitch Ratings, New York. have resulted from using exotic speculative structured finan- Liu, Lili. 2008. "Creating a Regulatory Framework for Managing Subna- cial products. In recent years, SNGs in some developed coun- tional Borrowing." In Public Finance in China: Reform and Growth for a tries have used such products with disastrous consequences. Harmonious Society, ed. Jiwei Lou and Shuilin Wang, 171­90. Washing- The global financial crisis has also brought home the im- ton, DC: World Bank. portance of developing domestic financial markets, including Liu, Lili, and Kim Song Tan. 2009. "Subnational Credit Ratings: A Com- subnational credit markets. A competitive and diversified parative Review." Policy Research Working Paper 5013. World Bank, Washington, DC. subnational credit market can help ensure the lowest cost Liu, Lili, and Michael Waibel. 2008. "Subnational Borrowing, Insolvency, and the sustainable availability of credit. This means opening and Regulation." In Macro Federalism and Local Finance, ed. Anwar access on equal terms to bank lending and bond issuance and Shah, 215­42. Washington, DC: World Bank. prohibiting monopolies of "municipal or development banks." ------. 2009. "Subnational Insolvency and Governance: Cross-Country Ex- Securities laws and market infrastructure are part of devel- periences and Lessons." In Does Decentralization Enhance Service Delivery and Poverty Reduction? ed. Ehtisham Ahmad and Giorgio Brosio, 333­ oping subnational credit markets. 76. Cheltenham, UK: Edward Elgar. Moody's Investor Service. 2010. "Sub-Sovereign Outlook 2010: Challenges Notes Persist and Downward Ratings Actions Expected." New York. NGA/NASBO (National Governors Association and National Association 1. The term subnational refers to all tiers of government of State Budget Officers). 2009. The Fiscal Survey of States Fall 2009. and public entities below the federal or central government. Washington, DC. http://www.nasbo.org/Publications/FiscalSurvey/tabid/ Subnational entities include states or provinces, counties, 65/Default.aspx. S&P (Standard & Poor's). 2010. "The Outlook for Europe's Local and Re- cities, towns, public utility companies, school districts, and gional Governments Is Broadly Stable in 2010, But LRGs in Spain and other special-purpose government entities that have the ca- Russia Face Pressures." New York. pacity to incur debt. 2. Data are from government Web sites and World Bank country teams. The Economic Premise note series is intended to summarize good practices and key policy findings on topics related to economic policy. It is produced by the Poverty Reduction and Economic Management (PREM) Network Vice-Presidency of the World Bank. The views expressed here are those of the authors and do not necessarily reflect those of the World Bank. The notes are available at www.worldbank.org/economicpremise.