The Political Austerity Cycle

Abstract

In the fall of 2008, Dublin-based Depfa Bank flapped its funding wings, creating a financial tornado in Wisconsin's 900-student Whitefish Bay High School. Depfa, an Irish bank specializing in municipal bond investments, had lent US$165 million to Wisconsin's school district. When Depfa stumbled into a cash-crunch, the Irish bank immediately withdrew funds from many of its U.S. municipal investments, including Whitefish Bay. Without funding from creditors like Depfa, the Wisconsin school district resigned to its fate of budget cuts, slashing spending initiatives and teacher retirement payouts. A financial motif for U.S. municipalities, the 2008 global financial crisis tightened foreign financial spigots for many cash-strapped local governments. For instance, the New York Metropolitan Transit Authority (MTA), deeply dependent on external financing from creditors like Depfa, approved a 7.5 percent increase in subway fares and tolls between 2010 and 2015 to plug its funding deficit. Ironically, the 2008 credit crisis that rippled through the United States is a familiar plight for many Latin American governments that repeatedly incurred “sudden stops” to their financing during the 1990s. Global finance has become a key player in domestic politics. The Whitefish Bay school district and the New York MTA did not want to cut teacher pensions or raise subway fares, but without funding from foreign creditors, they were left with few alternatives. These quandaries parallel the predicament of many Latin American countries during periods of high dependence on international bond markets.