Credit Ratings in the Presence of Bailout: The Case of Mexican Subnational Government Debt

Hernández-Trillo, Fausto; Smith-Ramirez, Ricardo

doi:10.1353/eco.0.0033

Cited by 8 publications

(13 citation statements)

References 42 publications

(33 reference statements)

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“…The framework regulates long-term debt contracts; short-term bridge loans used to close year-end fiscal accounts are unregulated and unreported. The framework was designed to improve oversight over subnational (long-term) debt decisions, strengthen the link between subnational fiscal solvency and public/private (long-term) lending, and eliminate bailout expectations for (long-term) debt (Revilla 2013;Hernández-Trillo et al 2009). However, several gaps in the framework allowed subnational governments to borrow and financial institutions to lend at rising and, in some cases, unsustainable levels.…”

Section: Empirical Strategymentioning

confidence: 99%

“…Development bank lending was based on internal bank assessments of subnational fiscal solvency. The failure to secure ratings or register private sector loans resulted in the loan's automatic capital risk re-weighting by bank regulators (Revilla 2013;Hernández-Trillo et al 2009). However, subnational fiscal accounts are notoriously nontransparent, and debt to service providers, short-term bridge loans, and contingent liabilities unregulated and unreported (Hurtado et al 2013;Hernández-Trillo et al 2009).…”

Section: Empirical Strategymentioning

confidence: 99%

“…Financial institutions were unable to assess fiscal solvency (Hernández-Trillo et al 2009). Subnational governments thus appeared willing to take great strides to avoid default.…”

Section: Empirical Strategymentioning

confidence: 99%

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Violent Crime and Capital Market Punishment: How Violent Crime Affects the Supply of Debt to Municipal Mexico

Benton

2017

St Comp Int Dev

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Research shows that violent and organized crime reduces foreign direct investment and that armed conflict lowers sovereign credit ratings. Building on these insights, I argue violent crime reduces financial institutions' confidence in the capacity of governments to repay loans, raising the costs attached to loans and reducing government debt through a "supply-side" logic. Yet, the supply-side logic is difficult to test. Governments can render lenders indifferent to violent crime by accepting higher borrowing costs, resulting in no observed relationship between them. It is for this reason that analysis of the effect of violent crime on credit ratings alone cannot tell us much about its effect on government debt. In this study, I explain how analysis of subnational debt from welfare-minded public banks and profit-minded private lenders can distinguish the supply-side logic from the null hypothesis. Cross-sectional time-series analysis of homicide rates and municipal debt in Mexico demonstrates support for the supply-side logic. Evidence of the supply-side logic reveals that those governments most in need of cost-efficient financing are most likely to be charged higher prices for it or priced out of capital markets altogether, signaling the need for market intervention in these cases.

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Section: Empirical Strategymentioning

confidence: 99%

Section: Empirical Strategymentioning

confidence: 99%

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Violent Crime and Capital Market Punishment: How Violent Crime Affects the Supply of Debt to Municipal Mexico

Benton

2017

St Comp Int Dev

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“…Those who consider that reallocation of responsibilities that decentralization implies can create situations of financial instability by softening the budget constraint that state and local governments face under centralized fiscal arrangements view it with concern (see Rodden, Eskeland, & Litvack, ). Situations of this type have resulted not only in policy proposals suggesting the crafting of legal frameworks to make SNG finances sustainable over the long run (Canuto & Liu, ; Sutherland, Price, & Joumard, ) but also in proposals to minimize the probability of a bailout (Hernández‐Trillo & Smith‐Ramírez, ).…”

Section: Background Literaturementioning

confidence: 99%

Subnational Bond Market Development: What Drives the Yield Spreads of Mexican Cebures?

Espinosa¹

2013

Latin American Policy

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A robust market for subnational bonds can provide emerging economies with additional tools to accelerate their economic growth. This article seeks to trigger a reflection on the factors that emerging nations such as Mexico would need to take into account if the aim is to issue bond instruments that are attractive to investors. This study assesses the factors affecting the yield spread of a sample of Mexican bonds known as Cebures. The analysis shows that only variables associated with the structure of the bond affect such yield spreads, not factors reflecting the financial strength of the issuing entity. Government policies aimed at modifying the implicit risk of this type of bonds may not be sufficient to alter bond buyer's risk perceptions.Un mercado de bonos subnacionales robusto puede dar a las economías emergentes herramientas adicionales para acelerar su desarrollo económico. Este artículo busca iniciar una reflexión sobre los factores que naciones emergentes como México deberían tomar en cuenta si el objetivo es emitir instrumentos de deuda atractivos a los inversionistas. El estudio evalúa los factores que afectan la dispersión del rendimiento de una muestra de bonos Mexicanos conocidos como Cebures. El análisis muestra que las variables que afectan la dispersión del rendimiento están asociadas con la estructura del bono y no con factores que reflejan la fortaleza financiera de la entidad emisora. Las políticas gubernamentales que busquen modificar el riesgo implícito en este tipo de bonos pueden no ser suficientes para alterar las percepciones de riesgo de los inversionistas.

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“…This growth has in part occurred because of new financing methods such as securitization. Additionally, risk‐rating agencies have given good credit ratings to entities that do not deserve them (Hernández Trillo & Smith‐Ramírez, 2009). Additionally, the legislative means of acquiring debt vary between different federal entities and even between the federal government and local entities.…”

Section: Problemsmentioning

confidence: 99%

Public Finance and Social Protection System Reforms in Mexico: Part I

Presa¹,

Trillo²,

López-Calva³

et al. 2012

Latin American Policy

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Mexico needs a proposal to integrate reforms into the social protection system as an indispensable factor for social cohesion with holistic fiscal reforms that create and nurture viability in the long term and improve the country's competitiveness. There is also a need for reforms that seek to break through the prevailing economic stagnation and provide the nation with medium-and long-term development opportunities. Specifically, it needs a proposal that addresses the overwhelming need to formalize a new social contract based on justice and sustained by economic growth that allows Mexico's democracy to work for all of its residents. This article seeks to conduct an exercise that is rarely attempted in Mexico: establish achievable short-and medium-term goals for universal social protection tied to revenue sources that provide long-term viability and sustainability.México necesita una propuesta que integre reformas al sistema de protección social como un factor indispensable para la cohesión social, con una reforma fiscal holística que fomente y cree viabilidad a largo plazo y mejore la competitividad del país. También se necesitan reformas que busquen superar el actual estancamiento económico y proporcionar a la nación oportunidades para el desarrollo a mediano y largo plazo. En específico, se necesita una propuesta que aborde la necesidad abrumadora de formalizar un nuevo contrato social basado en la justicia y sostenido por un crecimiento económico que permita que la democracia funcione para todos los residentes mexicanos. Este documento busca llevar a cabo un ejercicio que pocas veces se intenta en México y que consiste en establecer metas alcanzables para la protección social a corto y largo plazo, pero que las ligue con fuentes de ingresos que proporcionen una viabilidad y una sostenibilidad a largo plazo. Background Context S lightly over a decade since the beginning of the alternation of power at the federal executive level for the first time in modern Mexican political Latin American Policy-Volume 3, Number 2-Pages 272-336

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Credit Ratings in the Presence of Bailout: The Case of Mexican Subnational Government Debt

Cited by 8 publications

References 42 publications

Violent Crime and Capital Market Punishment: How Violent Crime Affects the Supply of Debt to Municipal Mexico

Violent Crime and Capital Market Punishment: How Violent Crime Affects the Supply of Debt to Municipal Mexico

Subnational Bond Market Development: What Drives the Yield Spreads of Mexican Cebures?

Public Finance and Social Protection System Reforms in Mexico: Part I

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