Default History Research Articles

Are China’s sovereign credit ratings underestimated?

We use a comprehensive database of sovereign credit ratings (SCRs) from Moody’s, Standard and Poor’s and Fitch for a cross-section of 120 countries from 1986–2009. Using panel data, we find that GDP per capita, the GDP growth rate and the degree of industrialization positively affect ratings, while the government cash flow deficit, the current account surplus, inflation, the lending minus deposit rate interest spread, the S&P global equity index, and a country’s default history negatively affect the sovereign rating of a country. An ordered probit model suggests that while earlier ratings may have been underestimated, recent Chinese sovereign credit ratings are not.

Burden of new and recurrent tuberculosis in a major South African city stratified by age and HIV-status.

AimTo describe the burden of tuberculosis (TB) in Cape Town by calculating TB incidence rates stratified by age and HIV-status, assessing the contribution of retreatment disease and estimating the cumulative lifetime TB risk in HIV-negative individuals.MethodsDetails of TB cases were abstracted from the 2009 electronic TB register. Population denominators were estimated from census data and actuarial estimates of HIV prevalence, allowing calculation of age-specific and HIV-stratified TB notification rates.ResultsThe 2009 mid-year population was 3,443,010 (3,241,508 HIV-negative and 201,502 HIV-positive individuals). There were 29,478 newly notified TB cases of which 56% were laboratory confirmed. HIV status was recorded for 87% of cases and of those with known HIV-status 49% were HIV-negative and 51% were positive. Discrete peaks in the incidence of non-HIV-associated TB occurred at three ages: 511/100,000 at 0–4 years of age, 553/100,000 at 20–24 years and 628/100,000 at 45–49 years with 1.5%, 19% and 45% being due to retreatment TB, respectively. Only 15.5% of recurrent cases had a history of TB treatment failure or default. The cumulative lifetime risks in the HIV-negative population of all new TB episodes and new smear-positive TB episodes were 24% and 12%, respectively; the lifetime risk of retreatment disease was 9%. The HIV-positive notification rate was 6,567/100,000 (HIV-associated TB rate ratio = 17). Although retreatment cases comprised 30% of the HIV-associated TB burden, 88% of these patients had no history of prior treatment failure or default.ConclusionsThe annual burden of TB in this city is huge. TB in the HIV-negative population contributed almost half of the overall disease burden and cumulative lifetime risks were similar to those reported in the pre-chemotherapy era. Retreatment TB contributed significantly to both HIV-associated and non-HIV-associated TB but infrequently followed prior inadequate treatment. This likely reflects ongoing TB transmission to both HIV-negative and positive individuals.

Evaluation of effect of community DOTS on treatment outcomes by TB surveillance data

The purpose of this study is to evaluate effects of community DOTS on treatment outcome by cohort data derived from TB surveillance system and to find further problems. New sputum smear positive pulmonary TB patients registered in 2003 and 1998 under standard course regimens. In Japan, DOTS as a method of directly observed treatment by Short Course Chemotherapy is divided into hospital DOTS and community DOTS. Hospital DOTS is to observe hospitalized patients' drug taking directly by hospital staff such as nurses, pharmacists or other hospital staff. Community DOTS is to observe or confirm discharged patients' drug taking by several methods such as direct observation at facility or patient's home, confirmation through checking treatment notes and examining empty blister packages and so on. TB patients were categorized to following 3 groups by available methods of community DOTS. Treatment outcome of patients registered in 2003 was compared with outcome of patients registered in 1998 as the control group before the introduction of community DOTS. Group 1: TB patients under PHC where at least daily observation DOTS (daily observation of drug taking at clinic or PHC to TB patients with risk factors of defaulting such as homeless, alcohol abuse, past history of default and so on) is available. Group 2: TB patients under PHC where home-visit DOTS (home-visit for observation of drug taking to the elderly TB patients who have risk to forget to take TB medicines regularly) only is available or, PHC where home-visit DOTS and confirmation DOTS (periodical confirmation of drug taking to TB patients without risk of defaulting) is available. Group 3: TB patients under PHC where only confirmation DOTS is available. Group 4: TB patients under PHC where community DOTS is not available. In addition, high death rate of patients under public assistance is analyzed. In group 1 with daily observation DOTS, TB patients under social or national health insurance showed higher treatment success rate and lower defaulter rate. TB patients with insurance for aged showed lower defaulter rate but high death rate due to old age did not improve. Patients under public assistance showed relatively lower defaulter rate. In group 2 with home-visit DOTS, TB patients with national health insurance and insurance for aged showed rather lower defaulter rate. Cohort evaluation of TB patients under group 3 with confirmation DOTS and group 4 without community DOTS is difficult as high rate of unknown treatment result. TB patients receiving public assistance showed lower death rate than patients requiring but not receiving public assistance. Patients detected at clinic and hospitals showed higher death rate than other patients detected by screening for high risk groups and so on. Daily observation DOTS and home-visit DOTS were effective to improve success rate and defaulter rate but effect of confirmation DOTS was not proved due to lack of information. High death rate of patients with insurance for aged in all groups and lack of treatment results in group 3 and 4 were problems to be solved in the future. In order to avoid TB death among TB patients under public assistance, screening for homeless people as high risk groups, earlier detection and referral system of TB symptomatics and improvement of coverage in public assistance might be effective and be tried.

Information Asymmetry and Customer Satisfaction: Insights from Bank Borrowers in Rural India

Information asymmetry limits the potential of rural banking system in India. We are currently in a situation where banks are equipped with better access to the borrower's profile which includes details of land titles, assets, trade-credit linkages, fellow guarantees and history of transactions and default. The borrowers, on the other hand, are generally less endowed with vital information like awareness about their credit limit, clarity on loan eligibility criteria, benefits of timely repayments, and ways and means to tide over difficult times. The paper, based on small borrower's responses from household survey, shows that bank branches which reduced these information asymmetry generally have greater likelihood of satisfied customers. One major policy implication of the findings of this paper is that information diffusion may have a critical role in unleashing the full potential of our banking system.

DOTS in primary care units in the city of Rio de Janeiro, Southeastern Brazil

OBJECTIVE: To describe the implantation and the effects of directly-observed treatment short course (DOTS) in primary health care units. METHODS: Interviews were held with the staff of nine municipal health care units (MHU) that provided DOTS in Rio de Janeiro City, Southeastern Brazil, in 2004-2005. A dataset with records of all tuberculosis treatments beginning in 2004 in all municipal health care units was collected. Bivariate analyses and a multinomial model were applied to identify associations between treatment outcomes and demographic and treatment process variables, including being in DOTS or self-administered therapy (SAT). RESULTS: From 4,598 tuberculosis cases treated in public health units administrated by the municipality, 1,118 (24.3%) were with DOTS and 3,480 (75.7%) with SAT. The odds of DOTS were higher among patients with age under 50 years, tuberculosis relapse and prior history of default or treatment failure. The odds of death were 52.0% higher among patients on DOTS as compared to SAT. DOTS modality including community health workers (CHWs) showed the highest treatment success rate. A reduction of 21.0% was observed in the odds of default (vs. cure) among patients on DOTS as compared to patients on SAT, and a reduction of 64.0% among patients on DOTS with CHWs as compared to those without CHWs. CONCLUSIONS: Patients with a "low compliance profile" were more likely to be included in DOTS. This strategy improves the quality of care provided to tuberculosis patients, although the proposed goals were not achieved.

Fitting and Forecasting Sovereign Defaults Using Multiple Risk Signals

In this article, we try to realize the best compromise between in‐sample goodness of fit and out‐of‐sample predictability of sovereign defaults. To do this, we use a new regression‐tree based approach that signals impending sovereign debt crises whenever pre‐selected indicators exceed specific thresholds. Using data from emerging markets and Greece, Ireland, Portugal and Spain (GIPS) over the period 1975–2010, we show that our model significantly outperforms existing competing approaches (logit, stepwise logit, noise‐to‐signal ratio and regression trees), while balancing in‐ and out‐of‐sample performance. Our results indicate that illiquidity (high short‐term debt to reserves) and default history, together with real GDP growth and US interest rates, are the main determinants of both emerging market country defaults and the recent European sovereign debt crisis.

Short- and long-run determinants of sovereign debt credit ratings

We study the determinants of sovereign debt credit ratings using rating notations from the three main international rating agencies, for the period 1995-2005. Using linear methods and ordered response models we employ a new specification that allows us to distinguish between short and long-run effects, on a country’s rating, of several macroeconomic and fiscal explanatory variables. The results point to a good performance of the estimated models, across agencies and time, as well as a good overall prediction power. Changes in GDP per capita, GDP growth, government debt, government balance have a short-run impact on a country’s credit rating, while government effectiveness, external debt, foreign reserves and default history are important long-run determinants. JEL: C23; C25; E44; F30; G15

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Book Review

Fundamentals or market sentiment: what causes country risk?

The country risk indicator, as measured by the JP Morgan's EMBI or grades of rating agencies such as Standard & Poor's (S&P's) or Moody's, does not seem to truly reflect the fundamentals of an economy. Countries that pursue sound economic policies are frequently placed on the same level as countries with a populist orientation or with a recent history of default or debt restructuring. Such circumstance generates a feeling of unease with regard to these ratings. The objective of this article is to investigate whether these indicators truly reflect market fundamentals or whether some sort of prejudice, or intolerance towards certain countries, can be identified. We use the Oaxaca–Blinder decomposition to analyse the differences in country risk, measured as by EMBI+, for a group of emerging markets. This decomposition allows us to separate the ‘justified’ (differences in fundamentals) from the ‘unjustified’ differences (same fundamental differently evaluated).

Pricing credit derivatives under incomplete information: a nonlinear-filtering approach

This paper considers a general reduced-form pricing model for credit derivatives where default intensities are driven by some factor process X. The process X is not directly observable for investors in secondary markets; rather, their information set consists of the default history and of noisy price observations for traded credit products. In this context the pricing of credit derivatives leads to a challenging nonlinear-filtering problem. We provide recursive updating rules for the filter, derive a finite-dimensional filter for the case where X follows a finite-state Markov chain, and propose a novel particle-filtering algorithm. A numerical case study illustrates the properties of the proposed algorithms.

On Graduation from Default, Inflation, and Banking Crises: Elusive or Illusion?

This paper uses a data set of over two hundred years of sovereign debt, banking and inflation crises to explore the question of how long it takes a country to "graduate" from the typical pattern of serial crisis that most emerging markets experience. We find that for default and inflation crises, twenty years is a significant market, but the distribution of recidivism has extremely fat tails. In the case of banking crises, it is unclear whether countries ever graduate. We also examine the more recent phenomenon of IMF programs, which sometimes result in "near misses" but sometimes end in default even after a program is instituted. The paper raises the important theoretical question of why countries experience serial default, and how they might graduate.

Management of gynecologic patients with precancerous disease

부인암 중 자궁경부암은 예방이 가능한 암으로 알려져 있는데, 전암 병변에서 장기간에 걸쳐 서서히 침윤성 암으로 진행하게 되므로 선별검사를 통한 조기 진단 및 치료가 효과적이기 때문이다. 전암 병변을 제대로 치료하지 못하면 침윤암의 위험을 증가시키고, 반대로 불필요할 정도로 과도하게 치료하면 합병증을 증가시킬 수 있기 때문에, 전암 병변을 적절하게 치료하는 것이 중요하다. 환자 개개인별로 치료방법을 선택할 때에는 환자의 나이, 출산경력, 나중에 아이를 갖고자 하는 열망, 선호도, 이전 세포검사 결과와 치료병력, 추적검사 중에 문제가 있었는지 여부, 수술자의 경험, 변형층 (transformation zone)이 보이지 않는 경우 등과 같은 사항을 고려한다.

Default and Settlement: Payment Resumption and Disclosure of Information

A country with a history of default has the advantage of having revealed information to the credit market on how it has conducted itself while confronting a default episode and how it might manage a possible default situation in the future. Under the assumption that a borrower is excluded for a finite period of time from the credit markets once it has defaulted, and that the period of exclusion can be used to negotiate the settlement conditions, this paper shows, using survival analysis techniques, that disclosure of information by the debtor will lead to a reduction in the time of the negotiation; that is, an increase in the settlement rate. This disclosure of information can be in the form of previous default or the credible announcement of fiscal reforms. Engaging in debt reduction or rescheduling under concessionary rates hurts the debtor's probability of reaching an agreement and settling the debt. The paper shows, using Standard and Poors dataset which includes default episodes that date back to the 1820s, that a country with a history of default has a higher probability of leaving the period of exclusion sooner than a country that has defaulted for the first time. Uncertainty reduction increases the settlement rate.

Default, Settlement, and Repayment History: A Unified Model of Sovereign Debt

This paper proposes a dynamic model of sovereign debt that combines default, settlement, and repayment history. The model addresses two questions: 1) how level of debt and income proflle afiect the length of time a country in default is excluded from the international credit market, and 2) how repayment history afiects the credit limit and interest rate lenders ofier, and the borrower’s incentive to default. In the model, borrowers weigh the beneflts from defaulting against the penalties associated with it, namely a lengthy exclusion from the market and a potential deterioration in the credit terms. The paper models the settlement as a random process to re∞ect ine‐ciencies that arise due to the existence of private information, but conditions the probability of a settlement on the portion of the defaulted debt borrowers agree to repay. The model incorporates repayment history (i.e., the number of years a country has been active in the international credit market) into the information set used by lenders. Quantitative analysis shows that the model can replicate some key stylized facts of sovereign debt: 1) settlement ofiers depend positively on a debtor’s current income level and negatively on its level of debt; 2) the debt-to-GDP ratio that new borrowers or serial defaulters can support is well below the ratio that proven debtors can safely manage; 3) the probability of default is larger for debtors with recent payment di‐culties; 4) once a country defaults, it takes many years of perfect repayment and low levels of debt for that country to gain continuous access to international credit markets at low cost; this process is slow and backsliding into default is di‐cult to avoid.

Trading Constraints Penalizing Default: A Recursive Approach

This paper presents trading constraints as an intertemporal penalty for default. It models an infinite-horizon economy with incomplete markets, where agents are allowed to not pay their liabilities and have financial trades restricted according to their history of default. Those constraints balance the economy's risk-sharing possibilities and repayment incentives. The equilibrium presents stationary properties, such as an invariant distribution for assets' solvency rates.

Determinants and Impact of Sovereign Credit Ratings

The authors conduct the first systematic analysis of the determinants and impact of the sovereign credit ratings assigned by the two leading U.S. agencies, Moody's Investor Services and Standard and Poor's. Of the large number of criteria used by the two agencies, six factors appear to play an important role in determining a country's credit rating: per capita income, GDP growth, inflation, external debt, level of economic development, and default history. In addition, the authors find that sovereign ratings influence market yields - particularly those on non-investment-grade issues - independently of any correlation with publicly available information.

On comparing the accuracy of default predictions in the rating industry

We consider 1927 borrowers from 54 countries who had a credit rating by both Moody’s and S&P at the end of 1998, and their subsequent default history up to the end of 2002. Viewing bond ratings as predicted probabilities of default, we consider partial orderings among competing probability forecasters and show that Moody’s and S&P cannot be ordered according to any of these. Therefore, the relative performance of the agencies depends crucially on the way in which probability predictions are compared.

Pooling Risk Among Countries

In this paper, we identify the groups of countries where international risk-sharing opportunities are most attractive. We show that the bulk of risk-sharing gains can be achieved in groups consisting of as few as seven members, and that further marginal benefits quickly become negligible. For many such small groups, the welfare gains associated with risk sharing can amount to one order of magnitude larger than Lucas's classic calibration suggested for the United States, under similar assumptions on utility. Why do we not observe more arrangements of this type? Large welfare gains can only be achieved within groups where contracts are probably seen as relatively difficult to enforce. International diversification can thus yield substantial gains, but these may remain untapped owing to potential partners' weak institutional quality and a history of default on international obligations. Noting that existing risk sharing arrangements often have a regional dimension, we speculate that shared economic interests such as common trade may help sustain such arrangements, though risk-sharing gains are smaller when membership is constrained on a regional basis.

Which factors determine sovereign credit ratings?

The purpose of this study is to examine the determinants of the sovereign credit ratings provided by the three major rating agencies: Fitch Ratings, Moody’s and Standard and Poor. A principal component analysis is employed in order to identify the common factors affecting these ratings. The impact of the variables correlated with these factors on ratings is then assessed through an ordered logistic model. Results show that sovereign ratings are mostly influenced by per capita income, government income, real exchange rate changes, inflation rate and default history. The study also highlights the importance of corruption, as measured by Transparency International’s Corruption Perceptions Index, which appears as a proxy for both economic development and the quality of the governance of a country.

Sovereign credit ratings: Guilty beyond reasonable doubt?

This paper questions the view that credit rating agencies aggravated the East Asian crisis by excessively downgrading those countries. I find that ratings are, if anything, sticky rather than procyclical. Assigned ratings exceeded predicted ratings before the crisis, mostly matched predicted ratings during the crisis period, and did not increase as much as predictions in the period after the crisis. Ratings are also found to react to non-macroeconomic factors such as lagged spreads and a country’s default history. Therefore it is questionable that ratings exacerbate the boom-bust cycle if they are simply reacting to news, whether macroeconomic or market.