In this paper, the concepts of probability of default, loss given default and expected loss in the internal ratings-based approach are introduced into the measurement of local government debt risk. Based on issuing interest rate and credit spreads of provincial government bonds, the default probability models of general debt and special debt are constructed and estimated, and the general and special debt risk of 333 prefectural governments in China from 2014 to 2017 are estimated respectively, and their regional distribution and changes are analyzed. The conclusions are as follows: Both general and special debt risk are different among regions. In terms of vertical changes in 2014-2017, debt risk has increased on the whole, but this increase has been driven more by the increase in the size of the debt, with no
significant change in the probability of default, and the debt risk is concentrated in a small number of prefectural governments. The general debt risk accounts for about two-thirds of the total debt risk, the special debt risk accounts for about one-third, and this proportion structure is basically unchanged in 2014-2017. Based on the above conclusions, this paper puts forward corresponding policy recommendations for governance and control of local debt risk.
Keywords: local government debt risk, general debt, special debt, credit spreads, probability of default
China Finance and Economic Review
Volume 8 Number 3 Autumn 2019.P3