Financing Costs of Local Government Financing Vehicle Bonds and Risk Contagion:From the Perspective of Non-standard Financing Defaults
Local government financing vehicles(LGFVs)mainly adopt three common financing meth-ods:bank loans,LGFV bonds,and non-standard financing.Due to low transparency and lack of standardized data,there is little literature to conduct in-depth research on non-standard financing.However,in recent years,non-standard defaults have occurred frequently,and the negative public opinion they trigger easily drags LGFVs'other debts into the mire and leads to a regional contagion effect.Given that the central government has always attached great importance to the risk resolution of local debt,it is of great significance to explore the impact of non-standard defaults on the implicit debt of local governments.This paper uses the bond issuance and non-standard default events of LGFVs,and local economic and fiscal data from January 2018 to September 2023.By comparing the bond issuance time and non-standard de-fault time,it identifies the LGFVs that have experienced non-standard defaults or been affected by the conta-gion effect before issuing bonds as the treatment groups,and studies whether the treatment groups face higher financing costs in the bond market.The main findings of this paper are as follows:First,the occurrence of non-standard default events of LGFVs will transmit risk signals to the market,resulting in higher bond finan-cing costs for LGFVs that have defaulted.Second,non-standard default risk has a significant contagion effect within cities,and its intensity shows the characteristics of attenuation with time,but the contagion effect between cities is not obvious.Third,the higher-rating,higher-administrative-level,and main LGFVs are more strongly affected by the contagion effect.The main contributions of this paper are as follows:First,it studies the local debt risk that may be brought by non-standard defaults,enriching and deepening the understanding of related fields.Second,it finds that non-standard default events can expose the actual solvency and credit risk of LGFVs,and have a significant impact on the public financing costs of LGFV bonds,which is suitable as a proxy variable for the credit risk of LGFVs.In the context of the government's repeated emphasis on breaking the rigid redemption,this finding is conducive to promoting the market-oriented pricing of LGFV bonds.
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