Abstract
Since 2007, Europe has been living through one of its deepest crises in recent history. What began as financial turmoil has quickly become a public-debt crunch. In Spain, public debt rose from less than 40% of GDP in 2008 to nearly 100% of GDP in 2013. This shock has resulted in a deterioration of public-debt ratings. In Spain, as in many other countries, public debt is composed not only of the central government’s debt but also of debt issued by sub-national entities. Although the evolution of national ratings has received broad attention in the literature, few articles have dealt with sub-national entities. The purpose of this article is to shed new light on the structure and evolution of the public-debt ratings of Spain’s regional governments. Our main contribution rests on an analysis of recent changes in the main variables, before and after the crisis, and specifically of the sustainability of the 2012 debt reform and the structure of Spain’s public debt.
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Source: Authors’ elaboration after OECD’s Subnational Government Structure and Finance (2016 edition). http://dx.doi.org/10.1787/888933363724
Source: Own elaboration. Data: Bank of Spain
Source: Own elaboration. Data: Bank of Spain and rating agencies
Source: Own elaboration.Data: Bank of Spain and ratings agencies
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Notes
The period runs from 1995 to 2016. Moody´s provides for our variable 209 observations for 11 regions. For the ‘Cantabria’ region, only the years 2004 and 2005 are covered. ‘Extremadura’ earns its first ratings in 2004. Similarly, Standard and Poor´s provides 224 observations for 12 regions. Ratings for ‘Murcia’ cover 2002 to 2004. For all other regions, the ratings period runs from 1995 to 2016.
The fund's mechanism is simple. Debt issued by regions participating in the FFR is acquired by the national government, which then reissues it, under stricter terms, on the financial markets. Participating regions thus gain access to better resources at a lower interest rate (the one accorded to the central government). In addition, because the owner of regional debt issued under the FFR is the central government, laxer terms of repayment are expected, in case said regions encounter new liquidity constraints. It bears noting that access to this mechanism is “not free”. Regions issuing debt within the FFR are subject to additional oversight from the central government. They must control their public deficits and track their debt, trying to reduce it to sustainable levels.
When the result of the average is a 0.5 value, is rounded up to the next value. That is, a 4.5 value is rounded up to 5.
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This paper was developed in the context of the Project ECO2016-79650-P from the Spanish Ministry of Economics and Innovation.
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Pérez-Balsalobre, S.J., Llano-Verduras, C. Modelling sovereign debt ratings for sub-national governments: the case of Spain before and after the crisis. Empirica 48, 373–395 (2021). https://doi.org/10.1007/s10663-019-09470-5
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DOI: https://doi.org/10.1007/s10663-019-09470-5