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

Fausto Hernandez-Trillo and Ricardo Smith-Ramírez ()

Economía Journal, 2009, vol. Volume 10 Number 1, issue Fall 2009, 45-79

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.

Keywords: Credit Ratings; Bailout; Subnational Governments; Debt (search for similar items in EconPapers)
JEL-codes: C3 G18 G19 H74 (search for similar items in EconPapers)
Date: 2009
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Working Paper: Credit ratings in the presence of bailout: the case of Mexican subnational government debt (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:col:000425:008585

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