Do Political Factors Affect the Risk of Local Government Default? Recent Evidence from Spain

  • Andrés Navarro-Galera University of Granada, Faculty of Economics and Business, Department of Accounting and Finance
  • Dionisio Buendía-Carrillo University of Granada, Faculty of Economics and Business, Department of Accounting and Finance
  • Juan Lara-Rubio University of Granada, Faculty of Economics and Business, Department of Accounting and Finance
  • Salvador Rayo-Cantón University of Granada, Faculty of Economics and Business, Department of Accounting and Finance
Keywords: default risk, credit risk, bank credit, political factors, local governments

Abstract

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.

Author Biographies

Andrés Navarro-Galera, University of Granada, Faculty of Economics and Business, Department of Accounting and Finance

Professor

Dionisio Buendía-Carrillo, University of Granada, Faculty of Economics and Business, Department of Accounting and Finance

Associate Professor

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Published
2017-01-31
Section
Articles