David Christoph Ehmke Knihy

What is the foundation of solid financial architecture? How is it possible to prevent a constant increase in taxes, debts and the misallocation of financial resources? The theory of institutional congruence provides a clear answer: The circles of decision makers, beneficiaries and payers must overlap to the greatest possible extent. This requires the consistent institutional centralisation or decentralisation of power and responsibilities regarding taxes, expenditure and debts. This study’s analysis of sovereign and subnational public entities in the eurozone, Germany, France, Canada, the USA and Switzerland as well as of debt crises among autonomous sovereign debtors shows how the implementation of institutional congruence works in practice.

Bond debt financing is a two-edged sword. Solvent debtors have the chance to attract numerous potential investors with an easily tradeable and flexible investment opportunity. In financial distress, information, coordination, and cooperation problems provide a hotbed for opportunistic strategies. This book explores the relation between debtors and bond creditors. Restructuring and insolvency procedures provided by the state are compared to private and contractual solutions functioning with institutions such as covenants, bond trustee, creditor committee, and collective action clauses. Restrictions on private contractual solutions – importantly, the voting prohibition in the US – as well as private circumvention strategies (i. e. exit consent and consent payments) are discussed critically. The author argues that private procedures before and outside of insolvency are best suited to achieve value-maximisation. The focus is on US and English law, complemented by a short analysis of German law.