The Nature and Design
Types of debt are defined by the kind of security given by the borrower. Creditors want to know not only where the money is expected to come from but also what their remedies and security are in the event of default. Knowing the security on debt is important: uncertainty about remedy and security can create risks that build inefficiencies into the market. If the remedies and security are not deemed adequate, markets may set risk pre- miums so high that credit is unaffordable to many jurisdictions.
What remedies should be available to creditors by law? This question is critical. Any framework for subsovereign borrowing needs to spell out what powers a jurisdiction has to pledge assets and revenue streams and to exer- cise its powers to set taxes, tariffs, and other levies. It is also desirable to spell out how such security can be affected by default or other financial emergency.
In most emerging market economies general purpose subsovereign debt has had some form of sovereign government backing. In many cases the subsovereign governments were merely administrative units of the central government under a unitary government concept. In other cases the only long-term funds available were supplied by international lending entities that typically required a sovereign guarantee. However, this is changing. Devolution has meant that national governments are encouraging subna- tional governments to borrow on their own credit.
Precisely what constitutes the credit of a subnational government, with- out an explicit or implicit guarantee by the national government, is often