Do Political Factors Affect the Risk of Local Government Default? Recent Evidence from Spain
DOI:
https://doi.org/10.4335/15.1.43-66(2017)Keywords:
default risk, credit risk, bank credit, political factors, local governmentsAbstract
High levels of debt, provoked by a situation of economic and financial crisis, constitute a major threat to the financial sustainability of governments in the euro zone and in many other parts of the world. This delicate state of public finances also affects local governments and has led researchers to study the variables that influence the volume of bank debt. However, few have specifically analysed the causes of local government default, although it has provoked spending cutbacks and tax increases in many countries. The aim of this paper is to examine political factors that may increase the risk of local government default. Using a logit model for panel data and applying the Basel II rules, we studied the financial performance of large local Spanish governments for the period 2006-2011. Our empirical findings reveal four political factors that may increase the risk of default (the mayor’sknowledge of finance and economics, a low percentage of women councillors, a left-wing ideology and ideological alignment with the regional government).These findings are of great interest for stakeholders who may be affected by local government default, including voters, taxpayers, users of public services, managers, policymakers, financial institutions, creditors, fiscal authorities and central government.
References
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Benito, B. & Bastida, F. (2004) The determinants of the municipal debt policy in Spain. Journal of Public Budgeting, Accounting and Financial Management,16(4), pp. 492-525.
Benito, B., Bastida, F. & Muñoz, M. J. (2010) Factoresexplicativos de la presión fiscal municipal; Revista de Contabilidad-Spanish Accounting Review, 13(2), pp. 239–283.
Benito, B., Bastida, F. & Vicente, C. (2012) Political budget cycles in local governments, Lex Localis – Journal of Local Self-Government, 10(4), pp. 341-361.
Brusca, I., Rossi, F. M. & Aversano, N. (2015) Drivers for the financial condition of local government: A comparative study between Italy and Spain, Lex Localis – Journal of Local Self-Government, 13(2), pp. 161-184.
Bunch. B.S. (1991) The effect of constitutional debt limits on state governments' use of public authorities, Public Choice, 68(1-3), pp. 57-69.
Cabaleiro-Casal, R. & Buch-Gómez, E. (2015) Public spending policies and budgetary balances: Evidence from spanish municipalities, Lex Localis – Journal of Local Self-Government, 13(4), pp. 973-994.
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Castrén, O., Dées, S. &Zaher, Z. (2010).Stress-testing euro area corporate default probabilities using a global macroeconomic model, Journal of Financial Stability, 6(2), pp.64-78.
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García-Sánchez, I. M., Rodríguez-Domínguez, L. & Gallego-Álvarez, I. (2011) The Relationship between Political Factors and the Development of E–Participatory Government, Information Society, 27(4), pp. 233-251.
Geys, B. & Revelli, F. (2011) Economic and political foundations of local tax structures: an empirical investigation of the tax mix of Flemish municipalities, Environment and Planning C: Government and Policy, 29(3), pp. 410-427.
Gómez, J. L. & Herrero, A. (2011) Political determinants of regional financing: the case of Spain, Environment and Planning C: Government and Policy, 29(5), pp. 802-820.
Gordy, M. B. (2003) A Risk-Factor Model Foundation for Ratings-Based Bank Capital Rules, Journal of Financial Intermediation, 12(3), pp. 199-232.
Grilli, V., Masciandaro, D. & Tabellini, G. (1991) Political and monetary institutions and public financial policies in the industrial countries, EconomicPolicy, 6(13), pp. 341-392.
Guillamón, M. D., Benito, B. & Bastida, F. (2011)Evaluación de la deuda pública local en España/Evaluation of local governmentdebt in Spain, Spanish Journal of Finance and Accounting, 40(150), pp. 251–285.
Gujarati, D. N. (2004) Basic Econometrics (New York: McGraw Hill Book Co.)
Hausman, J. A. (1978) Specification test in econometrics, Econometrica, 46(6), pp. 1251–1271.
Huyghebaert, N., Quan, Q. & Sun, L. (2014) Financing decisions after partial privatization in China: can a stock market quotation really provide discipline?, Journal of Financial Intermediation, 23(1), pp. 27–46.
IMF (2014) Vertical fiscal imbalances and the accumulation of government debt. Working Paper (Washington D.C.: IMF).
IFAC (2013) Reporting on the Long-term Sustainability of an Entity's Finances (IFAC: New York).
IGAE (2014) Avance de la actuación económica y financiera de las administraciones Públicas 2013 (IGAE: Madrid).
Jacobson, T., Lindé, J. & Roszbach, K. (2013) Firm default and aggregate fluctuations, Journal of the European Economic Association, 11(4), pp. 945–72.
Jennings, M. K. (1983) Gender roles and inequalities in political participation: Results from an eight-nation study, Western Political Quarterly, 36(3), pp. 364-385.
Lago, I. & Lago, S. (2009) Does thenationalization of party systems affect the composition of public spending?, Economics of Governance, 10(1), pp. 85-98.
León, J., Dorta, J. & Pérez, J. (2010) Contraste de los modelos de asignación presupuestaria en el presupuesto social municipal, Gestión y Políticas Públicas, 19(2), pp. 351–394.
LGA (2015) South Australia ModelFinancialStatements (WaggaWagga: Local Government Association of South Australia).
Mahdavi, M. & Horton, N. J. (2014) Financial Knowledge among Educated Women: Room for Improvement, Journal of ConsumerAffairs, 48(2), pp. 403–417.
Massolo, A. (1991) Mujeres en el espacio local y el poder municipal, Revista Mexicana de Sociología, 58(3), pp. 133-144.
McFadden, D. (2001) Economicchoices, American EconomicReview, 91(3), pp. 351–378.
McFadden, D. & Train, K. (2000) Mixed MNL models for discrete responses, Journal of Applied Econometrics, 15(5), pp. 447–470.
Ministry of Finance and Public Administration (2013) Order HAP/1781/2013 of 20 September 2013 by which approves the instruction normal local accounting model (BOE nº 237 of 3 October 2013) (Madrid: Ministry of Finance and Public Administration).
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Navarro-Galera, A., Rayo-Cantón, S., Lara-Rubio, J. &Buendía-Carrillo, D. (2015) Loan price modelling for local governments using risk premium analysis, Applied Economics, 47(58), pp. 6257-6276.
Pérez, G., Plata, A., Zafra, J. L. & López, A. M. (2013) Deuda viva municipal en un contexto de crisis económica: análisis de los factores determinantes y de las formas de gestión,Spanish Accounting Review,17(2), pp. 83–93.
Piotrowski, S. J. & Van-Ryzin, G. G. (2007) Citizen attitudes toward transparency in local government, American Review of Public Administration, 37(3), pp. 306-323.
Rodríguez, M. P., Navarro, A., Alcaide, L. & López, M. D. (2014) Factors influencing local government financial sustainability: An empirical study, Lex Localis – Journal of Local Self-Government, 12(1), pp. 31-54.
Roubini, N. & Sachs, J. (1989) Government Spending and Budget Deficits in the Industrial Economies. NBER Working Papers 2919 (Cambridge: National Bureau of Economic Research Inc.).
Ryan, C., Pini, B. & Brown, K. (2005) Beyond stereotypes: An exploratory profile of Australian women mayors, Local Government Studies,31(4), pp.443-448.
Schaltegge, C. A. & Torgler, B. (2006) Growth effects of public expenditure on the state and local level: evidence from a sample of rich governments, Applied Economics, 38(10), pp. 1181–1192.
Solé-Ollé, A. & Sorribas-Navarro, P. (2008) The effects of partisan alignment on the allocation of intergovernmental transfers. Differences-in-differences estimates for Spain, Journal of Public Economics, 92(12), pp. 2302–2319.
Solé-Ollé, A. & Sorribas-Navarro, P. (2012) The dynamic adjustment of local government budgets: does Spain behave differently?, Applied Economics, 44(25), pp. 3203–3213.
Tellier, G. (2006) Public expenditures in Canadian provinces: An empirical study of politico-economic interactions, Public Choice, 126(3/4), pp. 367–385.
Train, K. E. (2003) Discrete Choice Methods with Simulation (Cambridge University Press UK).
USAID (2011) Fundamentals of NGO Financial Sustainability (Washington DC: USAID).
USDT (2013) Initiatives about debt limit. State and local government series (USDT).
Worldwide Bank Group (2014) World Governance Indicators (Washington, D.C.: The World Bank).
Alcaraz-Quiles, F. J., Navarro-Galera, A. & Ortíz-Rodríguez, D. (2014) Factors determining online sustainability reporting by local governments, International Review of Administrative Sciences, 81(1), pp. 79-109.
Ashworth, J., Geys, B. & Heyndels, B. (2005) Government weakness and local public debt development in Flemish municipalities, International Tax and Public Finance,12(4), pp. 395–422.
Balaguer-Coll, M. T., Prior, D. & Tortosa-Ausina, E. (2016) On the determinants of Local Government: Does one size fit all?, International Public Management Journal, 19(4), pp. 1-30.
Bank of Spain (2008) Circular 3/2008 of 22 May 2008 to Credit Institutions on the Determination and Control of Minimum Own Funds (BOE of 10 June 2008) (Madrid: Bank of Spain).
Bank of Spain (2014) Boletín Estadístico del Banco de España (Madrid: Bank of Spain).
BCBS (2006) Basel II: International convergence of capital measurement and capital standards: A revised framework – comprehensive version (Basel: BCBS).
Bastida, F., Benito, B. & Guillamón, M. D. (2009) An empirical assessment of the municipal financial situation in Spain, International Public Management Journal, 12(4), pp. 484-489.
Bastida, F., Guillamón, M. D. & Benito. B. (2015) Fiscal transparency and the cost of sovereign debt”, available at: https://www.researchgate.net/publication/268216195_Fiscal_transparency_and_the_cost_of_sovereign_debt (December 23, 2016).
Bastida, F., Guillamón, M.D.& Benito, B. (2014) Explaining interest rates in local government borrowing, International Public Management Journal, 17(1), pp.45–73.
Bel, G. & Miralles, A. (2010) Choosing between service fees and budget funding to pay for local services: Empirical evidence from Spain, Government & Policy, 28(1), pp. 54-71.
Benito, B. & Bastida, F. (2004) The determinants of the municipal debt policy in Spain. Journal of Public Budgeting, Accounting and Financial Management,16(4), pp. 492-525.
Benito, B., Bastida, F. & Muñoz, M. J. (2010) Factoresexplicativos de la presión fiscal municipal; Revista de Contabilidad-Spanish Accounting Review, 13(2), pp. 239–283.
Benito, B., Bastida, F. & Vicente, C. (2012) Political budget cycles in local governments, Lex Localis – Journal of Local Self-Government, 10(4), pp. 341-361.
Brusca, I., Rossi, F. M. & Aversano, N. (2015) Drivers for the financial condition of local government: A comparative study between Italy and Spain, Lex Localis – Journal of Local Self-Government, 13(2), pp. 161-184.
Bunch. B.S. (1991) The effect of constitutional debt limits on state governments' use of public authorities, Public Choice, 68(1-3), pp. 57-69.
Cabaleiro-Casal, R. & Buch-Gómez, E. (2015) Public spending policies and budgetary balances: Evidence from spanish municipalities, Lex Localis – Journal of Local Self-Government, 13(4), pp. 973-994.
Capalbo, E. & Grossi, G. (2014) Assessing the influence of socioeconomic drivers on Italian municipal financial destabilization, Public Money & Management, 34(2), pp. 107–114.
Carr, J. B. & Karuppusamy, S. (2010) Reassessing the link between city structure and fiscal policy: Is the problem poor measures of governmental structure?; The American Review of Public Administration, 40(2), pp. 209–228.
Castrén, O., Dées, S. &Zaher, Z. (2010).Stress-testing euro area corporate default probabilities using a global macroeconomic model, Journal of Financial Stability, 6(2), pp.64-78.
Centre for Sociological Research (2014) Survey on three main concerns existing in Spain (Madrid: CIS Spain).
EC. (2011) Council Directive 2011/85/EU of 8 November 2011 on requirements for budgetary frameworks of the Member States.
EU (2012) Fiscal Sustainability Report, available at http://ec.europa.eu/economy_finance/publications/european_economy/2012/pdf/ee-2012-8_em.pdf (December 23, 2016).
EU (2015) Stability and Growth Pact, available at http://ec.europa.eu/economy_finance/economic_governance/sgp/index_en.htm (December 23, 2016).
FASAB (2014) FASAB Handbook of Federal Accounting Standards and Other Pronouncements as Amended, available at http://fasab.gov/pdffiles/2014_fasab_handbook.pdf (December 23, 2016).
Fundación La Caixa.(2014). Memoria de sostenibilidad 2012. Barcelona,Spain.
Galli, E. & Padovano, F. (2002) A Comparative Test of Alternative Theories of the Determinants of Italian Public Deficits (1950-1998), Public Choice, 113(1/2), pp. 37–58.
García-Sánchez, I. M., Rodríguez-Domínguez, L. & Gallego-Álvarez, I. (2011) The Relationship between Political Factors and the Development of E–Participatory Government, Information Society, 27(4), pp. 233-251.
Geys, B. & Revelli, F. (2011) Economic and political foundations of local tax structures: an empirical investigation of the tax mix of Flemish municipalities, Environment and Planning C: Government and Policy, 29(3), pp. 410-427.
Gómez, J. L. & Herrero, A. (2011) Political determinants of regional financing: the case of Spain, Environment and Planning C: Government and Policy, 29(5), pp. 802-820.
Gordy, M. B. (2003) A Risk-Factor Model Foundation for Ratings-Based Bank Capital Rules, Journal of Financial Intermediation, 12(3), pp. 199-232.
Grilli, V., Masciandaro, D. & Tabellini, G. (1991) Political and monetary institutions and public financial policies in the industrial countries, EconomicPolicy, 6(13), pp. 341-392.
Guillamón, M. D., Benito, B. & Bastida, F. (2011)Evaluación de la deuda pública local en España/Evaluation of local governmentdebt in Spain, Spanish Journal of Finance and Accounting, 40(150), pp. 251–285.
Gujarati, D. N. (2004) Basic Econometrics (New York: McGraw Hill Book Co.)
Hausman, J. A. (1978) Specification test in econometrics, Econometrica, 46(6), pp. 1251–1271.
Huyghebaert, N., Quan, Q. & Sun, L. (2014) Financing decisions after partial privatization in China: can a stock market quotation really provide discipline?, Journal of Financial Intermediation, 23(1), pp. 27–46.
IMF (2014) Vertical fiscal imbalances and the accumulation of government debt. Working Paper (Washington D.C.: IMF).
IFAC (2013) Reporting on the Long-term Sustainability of an Entity's Finances (IFAC: New York).
IGAE (2014) Avance de la actuación económica y financiera de las administraciones Públicas 2013 (IGAE: Madrid).
Jacobson, T., Lindé, J. & Roszbach, K. (2013) Firm default and aggregate fluctuations, Journal of the European Economic Association, 11(4), pp. 945–72.
Jennings, M. K. (1983) Gender roles and inequalities in political participation: Results from an eight-nation study, Western Political Quarterly, 36(3), pp. 364-385.
Lago, I. & Lago, S. (2009) Does thenationalization of party systems affect the composition of public spending?, Economics of Governance, 10(1), pp. 85-98.
León, J., Dorta, J. & Pérez, J. (2010) Contraste de los modelos de asignación presupuestaria en el presupuesto social municipal, Gestión y Políticas Públicas, 19(2), pp. 351–394.
LGA (2015) South Australia ModelFinancialStatements (WaggaWagga: Local Government Association of South Australia).
Mahdavi, M. & Horton, N. J. (2014) Financial Knowledge among Educated Women: Room for Improvement, Journal of ConsumerAffairs, 48(2), pp. 403–417.
Massolo, A. (1991) Mujeres en el espacio local y el poder municipal, Revista Mexicana de Sociología, 58(3), pp. 133-144.
McFadden, D. (2001) Economicchoices, American EconomicReview, 91(3), pp. 351–378.
McFadden, D. & Train, K. (2000) Mixed MNL models for discrete responses, Journal of Applied Econometrics, 15(5), pp. 447–470.
Ministry of Finance and Public Administration (2013) Order HAP/1781/2013 of 20 September 2013 by which approves the instruction normal local accounting model (BOE nº 237 of 3 October 2013) (Madrid: Ministry of Finance and Public Administration).
Moody’s Investors Service (2013) A Methodology of Rating to Local and Regional Governments (New York: Moody’s Investors Service).
NAO (2013) Funding and structures for local economic growth. Department for Communities and Local Government and Department for Business Innovation & Skills (London: NAO).
Navarro-Galera, A., Rayo-Cantón, S., Lara-Rubio, J. &Buendía-Carrillo, D. (2015) Loan price modelling for local governments using risk premium analysis, Applied Economics, 47(58), pp. 6257-6276.
Pérez, G., Plata, A., Zafra, J. L. & López, A. M. (2013) Deuda viva municipal en un contexto de crisis económica: análisis de los factores determinantes y de las formas de gestión,Spanish Accounting Review,17(2), pp. 83–93.
Piotrowski, S. J. & Van-Ryzin, G. G. (2007) Citizen attitudes toward transparency in local government, American Review of Public Administration, 37(3), pp. 306-323.
Rodríguez, M. P., Navarro, A., Alcaide, L. & López, M. D. (2014) Factors influencing local government financial sustainability: An empirical study, Lex Localis – Journal of Local Self-Government, 12(1), pp. 31-54.
Roubini, N. & Sachs, J. (1989) Government Spending and Budget Deficits in the Industrial Economies. NBER Working Papers 2919 (Cambridge: National Bureau of Economic Research Inc.).
Ryan, C., Pini, B. & Brown, K. (2005) Beyond stereotypes: An exploratory profile of Australian women mayors, Local Government Studies,31(4), pp.443-448.
Schaltegge, C. A. & Torgler, B. (2006) Growth effects of public expenditure on the state and local level: evidence from a sample of rich governments, Applied Economics, 38(10), pp. 1181–1192.
Solé-Ollé, A. & Sorribas-Navarro, P. (2008) The effects of partisan alignment on the allocation of intergovernmental transfers. Differences-in-differences estimates for Spain, Journal of Public Economics, 92(12), pp. 2302–2319.
Solé-Ollé, A. & Sorribas-Navarro, P. (2012) The dynamic adjustment of local government budgets: does Spain behave differently?, Applied Economics, 44(25), pp. 3203–3213.
Tellier, G. (2006) Public expenditures in Canadian provinces: An empirical study of politico-economic interactions, Public Choice, 126(3/4), pp. 367–385.
Train, K. E. (2003) Discrete Choice Methods with Simulation (Cambridge University Press UK).
USAID (2011) Fundamentals of NGO Financial Sustainability (Washington DC: USAID).
USDT (2013) Initiatives about debt limit. State and local government series (USDT).
Worldwide Bank Group (2014) World Governance Indicators (Washington, D.C.: The World Bank).
Published
2017-01-31
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