University of Orleans
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Modeling State Credit Risks in Illinois and Indiana
I use an open-source budget-simulation model to evaluate Illinois’s credit risk and to compare it to that of Indiana, a neighboring state generally believed to have better fiscal management. Based on a review of the history and theory of state credit performance, I assume that a state will default if the aggregate of its interest and pension costs reaches 30 percent of total revenues. In Illinois, this ratio is currently 10 percent, compared to 4 percent in Indiana. My analysis finds that neither state will reach the critical threshold in the next few years under any reasonable economic scenario, suggesting no material default risk. Over the longer term, Illinois has some chance of reaching the default threshold, but it would likely be able to take policy actions to lower the ratio before then. If market participants accept my finding that Illinois does not have material default risk, Illinois’s bond yields willfall, yielding cost savings for taxpayers as the state rolls over its debt.
Why don’t Banks Lend to the Private Sector in Egypt?
Bank credit to the private sector fell as a share to GDP during the last decade, in spite of a successful bank recapitalization in the middle of the 2000s and high and stable growth before the recent macroeconomic turmoil. This paper explains this trend based on both bank supply factors and demand for credit from the private sector. First the paper describes the evolution of the banks’ sources and uses of funds in the period 2005-2011, characterized by two different cycles of external capital flows. Then it estimates supply and demand equations of credit to the private sector, using quarterly data for the period 1999-2011. First, the system of simultaneous equations is estimated assuming continuous market clearing. Then the system is estimated allowing for transitory disequilibrium. In general, the main results are robust to the market clearing assumption. Our main findings show that, while real industrial production and the stock market have a significant impact on credit demand, deposits and claims on government affected the supply of credit in Egypt. Finally, both models yield similar results for the most recent period of private credit contraction: the single most important factor explaining the largest share of the decline is the expansion of banking credit to the public sector. The slowdown in economic activity and the contraction of bank deposits explain the remainder of the predicted contraction in bank credit to the private sector.
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