Modelling sovereign debt ratings for sub-national governments: the case of Spain before and after the crisis

Abstract

Since 2007, Europe has been living through one of its deepest crises in recent history. What began as financial turmoil has quickly become a public-debt crunch. In Spain, public debt rose from less than 40% of GDP in 2008 to nearly 100% of GDP in 2013. This shock has resulted in a deterioration of public-debt ratings. In Spain, as in many other countries, public debt is composed not only of the central government’s debt but also of debt issued by sub-national entities. Although the evolution of national ratings has received broad attention in the literature, few articles have dealt with sub-national entities. The purpose of this article is to shed new light on the structure and evolution of the public-debt ratings of Spain’s regional governments. Our main contribution rests on an analysis of recent changes in the main variables, before and after the crisis, and specifically of the sustainability of the 2012 debt reform and the structure of Spain’s public debt.