Research on the Risk of Local Government Special Debt Based on KMV Model: Taking A Province as an Example

Abstract

Since 2015, the issuance of special bonds by local governments has experienced rapid growth. Special bonds have played a constructive role in stimulating fixed asset investment and infrastructure development, emerging as a pivotal financing mechanism for local governments. This study takes A province as a case study, compiling data on its bond issuance and employing the KMV model to calculate the anticipated default probability and overall default risk of A province's special bonds during 2023-2025. Furthermore, a comparative analysis is conducted with neighboring provinces such as C and B. The findings indicate that A province's government debt risk is generally manageable; however, there exists some level of default risk associated with special bonds. It should be noted that when considering refinancing bond issuance, the repayment of principal and interest on local government special bonds heavily relies on these refinancing instruments, temporarily reducing but not eliminating default risk. Finally, based on empirical analysis results, several policy recommendations are proposed to address the risks posed by local government debt.