General-Purpose Local Government Defaults: Type, Trend, and Impact

Local governments default on bonds when they fail to comply with the monetary and nonmonetary aspects of the debt contracts. Analyses of defaults have relied on reports from credit rating agencies, which include only rated bonds undergoing monetary defaults. Using a unique and comprehensive dataset of defaults, we examine all general-purpose government defaults from 2009 to 2015 and find defaults to be more common than previously reported. We present a typology of defaults and characteristics of defaulted bonds. Most defaults occur among nongeneral obligation bonds and did not affect the yield of future, unrelated credits of the same issuer, providing support to the credit segmentation hypothesis.