Local Government Indebted-ness and Debt Management in Switzerland – Causes and consequences

Abstract

The indebtedness of local governments has the potential to be highly detrimental at both local and central government levels. The objective of the present case study is to present the indebtedness and subsequent restructuring of the municipality of Leukerbad, highlighting the causes leading to the debt, problem management, legislative actions taken in response to the matter and the evaluation of the effectiveness of these measures. The reasons for the indebtedness of Swiss local governments were the soft legal framework and non-adherence to various fundamental statutory regulations. A restructuring concept was developed to set-tle the debt, according to which the municipality – through an enterprise established for this very purpose – pays 22 per cent of accumulated debt to creditors and holds out the prospect of repaying a further 11 per cent. The majority of creditors ultimately accepted this restructuring concept. Legislators reviewed the Local Government Act of 1980 and drafted a new Act in 2004, as a result of which the financial situation of municipalities of the Canton of Valais improved considerably.