Local Government Debt Credit risk and Safe Debt Scale Based on the KMV Model

ABSTRACT

Based on the idea of KMV model to build China's local government debt credit risk model, and associate the credit risk with borrowing scale to put forward the moderate debt scale of local government. Studies show that: The credit risks of local government debt is very sensitive to debt scale, When debt scale increases to a certain extent, the government’s default probability will rise sharply, the safe debt scale should be controlled before the default probability increases rapidly; The actual distribution of fiscal revenue has higher kurtosis compared to the lognormal distribution assumption, for the same debt scale, the default probability of local government debt based on the actual distribution is higher than the default probability under theoretical distribution. Suggest to develop the local government bond market, to improve the local government credit rating system, information disclosure system and bond insurance system.

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