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Solvency and Default Risk of Local Government Debt——An Empirical Research Based on KMV Modified Model

【Authors】
HONG Yuan, HU Zhengrong
【WorkUnit】
Hunan University, 410079.
【Abstract】

Based on the dual dimension of the flow and stock of the local government solvency framework, the paper constructs the KMV modified model to assess the default risk of local government debts under the new policy of debt management. The paper arrives at several findings: First, if we do not consider the replacement of the local governmental outstanding debts, in the case of conservative solvency, the provincial default risk is high. And compared to the general debt, the provincial special debt default risk is low. Second, if we consider the replacement of the local government outstanding debts, in the long term, it will not fundamentally eliminate the provincial government possible debt default risk. Third, the change of the growth rate of different solvency has different influence on the default risk of the local government debt. Fourth, compared with the average debt repayment period of three years, the average debt repayment period of six years can cover the actual balance of the current debt limit, and the debt scale deviation rate has fallen sharply.

JEL:H63,H74,H81

【KeyWords】
Local Government Debt, Solvency, Default Risk, KMV Modified Model