Analysing credit risk in large local governments: an empirical study in Spain

ABSTRACT

In governments throughout the world, bank lending excesses, solvency issues and worsening credit ratings have all contributed to raising risk premiums and impeding access to credit, thus provoking a major financial problem in the public sector. Accordingly, tax authorities and regulators need to analyse the causes of public sector bank debt, doing so through the joint study of idiosyncratic and systematic variables, an area that has been neglected in previous research. This paper examines idiosyncratic and systematic factors that may influence local government credit risk through an empirical study of the performance of 148 large Spanish municipalities during 2006–2011. We identify individual factors relevant to the probability of local government default (such as dependent population, per capita income and debt composition) and also determinants associated with macroeconomic developments, such as gross domestic product and the risk premium.

KEYWORDS:

• Credit risk
• default
• local governments
• idiosyncratic and systematic factors
• Basel II

Disclosure statement

No potential conflict of interest was reported by the authors.

Additional information

Notes on contributors

Juan Lara-Rubio

Juan Lara-Rubio is an associate professor of finance at the University of Granada, Spain. His research interests include the study of credit risk and the Basel II banking regulations in microfinance institutions and local government. He has published in journals such as Expert Systems with Applications, Applied Economics and International Review of Administrative Science. Currently, his research focuses on the pricing loan model under Basel II and III.

Salvador Rayo-Cantón

Salvador Rayo-Cantón is an associate professor of financial economics and accounting at the University of Grenada, Spain. He has published in the Institute of European Finance, and in journals including the Journal of Economics, Finance and Administrative Science, Expert Systems with Applications and Applied Economics. His research focuses on the pricing loan model under Basel II and III.

Andrés Navarro-Galera

Andrés Navarro-Galera is a professor at the University of Granada, Spain. He has authored books and book chapters published by the Supreme Audit Institutions and General Intervention of State, in Spain, and has published in journals such as Public Money and Management, the Journal of Policy Modeling, and Applied Economics or Abacus, a Journal of Accounting and Finance Studies.

Dionisio Buendia-Carrillo

Dionisio Buendía-Carrillo is an associate professor of accounting and finance at the University of Granada, Spain. His research interests focus on economic and financial information systems in public administration, and he has published in journals such as Applied Economics, International Journal of Information Management and International Review of Administrative Sciences.