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Credit ratings in the presence of bailout: the case of Mexican subnational government debt

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  • Hernández-Trillo, Fausto
  • Smith-Ramírez, Ricardo

Abstract

Searching for an explanation for investment grades assigned to virtually bankrupt subnational governments in LDCs, we study the determinants of bond ratings for municipalities in Mexico. Our data set includes ratings from three agencies: S&P, Fitch, and Moody´s. To control for selectivity in the process of choosing an agency, we model the problem as a tri-variate selfselection process with ordinal responses. Additionally, in order to circumvent the estimation of multidimensional integrals, we implement a Monte Carlo Expectation Maximization (MCEM) algorithm. We find that not only financial but also political factors, such as number of voters and political party in power, are important and show evidence that the probability of bailout has a heavy weight in the rating process. Our outcomes question the purpose of rating sub-national debt in LDCs with a bailout tradition, since in those cases the market may assess the risk of subnational entities as that of sovereign instruments.
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Suggested Citation

  • Hernández-Trillo, Fausto & Smith-Ramírez, Ricardo, 2009. "Credit ratings in the presence of bailout: the case of Mexican subnational government debt," LSE Research Online Documents on Economics 123370, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:123370
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    References listed on IDEAS

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    Cited by:

    1. Xing Li & Xiangyu Ge & Cong Chen, 2022. "Several explorations on how to construct an early warning system for local government debt risk in China," PLOS ONE, Public Library of Science, vol. 17(2), pages 1-27, February.
    2. Ernesto del Castillo & René Cabral & Eduardo Saucedo, 2022. "The Sustainability of Mexican Municipal Public Debt," Sustainability, MDPI, vol. 14(11), pages 1-14, May.

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    More about this item

    JEL classification:

    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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