What Explain Credit Defaults? A Comparative Study

The paper argues that although key improvements in credit risk modelling have been made - motivated by Basel-II capital adequacy standard - yet the current turmoil in the global credit markets couldn’t be forecasted and subsequently avoided. The aim of the study is to investigate the cyclical implications of aggregate defaults in an economy. The approach used here is to construct a macroeconomic credit model that provides a basis to perform scenario analysis. Within this framework, investigation is based on comparing two countries, a relatively immune economy from the current global crisis - Australia and the worst affected economy - USA. The key questions to solve are which macroeconomic variables are important for each country and the impact adverse macroeconomic shocks will induce to it. The analysis is based on quarterly data from 1995Q1 to 2009Q2 for both the countries. The results show that the same set of macroeconomic variables indicates different default rates for the two countries and that the US economy is much more susceptible to adverse macroeconomic shocks than Australian economy.