Default Risk Assessment Of Local Government Debt Based On Central Government Tolerance

The fiscal revenue of Chinese local government has declined sharply after tax system reform. In response to the four trillion bailout plan against the financial crisis put forward by the central government, local government has borrowed a large amount of government debt, which leads to a higher default risk.Under China’s special political and economic system, the central government will not turn a blind eye on local government debt risk, or buy them out. Basing on above status, the factor of "the tolerance of the central government" has been introduced to interpret the rescue degree can be offered from the central government to ease the debt crisis for the local government. Meanwhile, the factor will be applied to the modified KMV model, which will come to a series of significant conclusions by accurately measure credit risk of local government debt.