Marketization vs. market chase: Insights from implicit government guarantees

Xiaoqian Zhang and Zhiwei Wang

International Review of Economics & Finance, 2020, vol. 69, issue C, 435-455

Abstract: Local Government Financing Vehicles (LGFVs) and state-owned enterprises (SOEs) provide implicit guarantee during the issuing of bonds, thereby reducing their funding cost. The credit spreads are lower when issued by a LGFV with a higher administrative level. This means that implicit guarantee is also strengthened with government centralization. We also explain the anomaly of municipal corporate bonds (MCBs)’ spreads decrease after a marketization regulation of removing implicit guarantees. This paper provides strong evidence that the market will chase implicit guarantee when default wave comes even under tight government regulations.

Keywords: Implicit guarantee; State ownership; Credit spreads; Government intervention (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:69:y:2020:i:c:p:435-455

DOI: 10.1016/j.iref.2020.06.021

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