Credit risk modelling: default probabilities for Portuguese municipalities

Janda, Karel and Moreira, David (2016): Credit risk modelling: default probabilities for Portuguese municipalities.

Abstract

This paper investigates whether the economic adjustment program and post-program surveillance contributed positively to the structural recover of the Portuguese economy. This examination was conducted observing evidences related to several objectives included in the programs and on a sample of data collected from local defaulted and non-defaulted municipalities. Our results confirm that the financial aid provided by EC, ECB, and IMF had a small impact on the internal economic adjustment. There is a residual positive impact from the implemented reforms to promote growth, jobs, public debt, deficit, and stability of the country’s financial sector. The evidence is revealed by the measurement of the key program achievements and by the indicators related to the current high default probabilities of a large number of local municipalities.

• Item Type: MPRA Paper
• Language: English
• Keywords: public finance, municipalities, default, international aid
• Subjects: E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook; G - Financial Economics > G2 - Financial Institutions and Services > G28 - Government Policy and Regulation; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O11 - Macroeconomic Analyses of Economic Development

References

[1] Ang, A. and Green, R, (2011). Lowering Borrowing Costs for States and Municipalities Through CommonMuni. The Hamilton Project, Brookings Institution. Retrieved 27 August 2012.

[2] Bialaszewski , K. L. (1985). Prediction of Municipal Revenue Bond Default - An Empirical Analysis Using the Logit Model. Unpublished Dissertation. Mississippi State University

[3] Cristina Arellano, (2014): Default Risk and Income Fluctuations in Emerging Economies. Published by: American Economic Association. The American Economic Review, Vol. 98, No. 3 (Jun., 2008), pp. 690-712

[4] Falkenstein, E., Boral, A. and Carty, L. (2000). RiskCalcTM for Private Companies: Moody’s Default Model. New York: Moody’s Investors Service.

[5] Holian, M. - Joffe, M. (2013): Assessing Municipal Bond Default Probabilities. DRAFT submitted to the California Debt and Investment Advisory Commission and the Center for California Studies and for peer review.

[6] Izak, V. (2015) Indebtedness and Corporate Finance Structure. Theoretical and practical aspects of public finance 2015: proceedings of the 20th international conference. Praha: Oeconomica, 2015, s. 86-90. ISBN 978-80-245-2094-0.

[7] Janda, K. - Zetek, P. (2014b): "The Impact of Public Spending on the Financial Performance of Microfinance Institutions." In Lucie Sedmihradska (ed.), Proceedings of the 19th International Conference Theoretical and Practical Aspects of Public Finance 2014, Wolters Kluwer, Prague, Czech Republic, 2014, pp. 109-125.

[8] Jakubík, P, - Teplý, P. (2011): “The JT Index as an Indicator of Financial Stability of Corporate Sector”. Prague Economic Papers, 20 (2), pp. 157-176.

[9] “Portal Autarquico”, governmental website with administrative and legal info related to local municipalities. URL: http://www.portalautarquico.pt/pt-PT/financas-locais/dados-financeiros/contas-de-gerencia/

[10] Pordata, has the collection, compilation, systematization and dissemination of data on multiple areas of society, for Portugal and its municipalities, and for the European countries, URL: http://www.pordata.pt/en/Home

[11] “Public budgeting”, Portuguese website listing the public institutions which were in default. URL: http://www.dgo.pt/Paginas/default.aspx

[12] Ohlson. J.S. (1980). Financial ratios and the probabilistic prediction of bankruptcy. Journal of Accounting Research 18(1) 109–131.

[13] Pavel, J. - Vítek, L. (2014). Tax Compliance Costs: Selected Post-transitional Countries and the Czech Republic. Procedia Economics and Finance. 2014. v. 12, p. 508--515.ISSN,2212-5671. URL: http://www.sciencedirect.com/science/article/pii/S2212567114003736

[14] Potluka, Otakar, Klazar, Stanislav (2013). Structure of Governments and Inflation in CEE Countries. In Liberec Economic Forum. Liberec: Technická univerzita v Liberci, 2013, s. 477--484. ISBN 978-80-7372-953-0. URL: http://www.lef-tul.cz/sekce/LEF_2013.pdf

[15] Roger Stien. Benchmarking default prediction models: Pitfalls and remedies in model validation. Moody's KMV, 2002.

[16] Shumway T. (2002). Forecasting Bankruptcy More Accurately: A Simple Hazard Model. Journal of Business, 74(1), 101-124.

[17] Stadnik, B. (2014): The Volatility Puzzle of Bonds. Conference: 8th International Scientific Conference on Business and Management 2014, Location: Vilnius, LITHUANIA Date: MAY 15-16, 2014, Book Series: Business and Management-Spausdinta, Pages: 313-319 Article Number: bm.2014.039 Published: 2014

[18] Stadnik, B.,Miecinskiene, A.(2015): A.: Complex Model of Market Price Development and its Simulation. Journal of Business Economics and Management, Volume: 16, Issue: 4, Pages: 786-807, Published: JUL 4 2015

[19] Teplý, P. - Tripe, D. (2015): “The TT Index as an Indicator of Macroeconomic Vulnerability of EU New Member States.” Journal of Economics. 63 (1), pp. 19–33.