The determinants of households’ repayment difficulties on mortgage loans: evidence from Italian microdata

This article investigates the main determinants of households’ repayment difficulties on mortgage loans in Italy. We contribute to the empirical literature on household financial vulnerability by assessing the joint impact of socio‐demographic factors, loan characteristics and institutional variables on the likelihood of mortgage insolvency and on the intensity of arrears. Using data from the Italian component of the 2008 European Union‐Statistics on Income and Living Conditions (EU‐SILC) survey, we firstly identify which types of households are more vulnerable to unexpected adverse events that may trigger repayment difficulties. Specifically, households whose head is young, unemployed or immigrant show a higher probability of arrears and emerge as those suffering more from the adverse economic conditions connected to the crisis. Moreover, household repayment behaviour is affected by mortgage characteristics and, in particular, having modified contract terms significantly increases current arrears probability. Finally, regional institutional and credit market factors mainly impact on the conditional intensity of arrears. This evidence suggests that, although repayment difficulties mainly arise from a genuine inability to repay, households are less likely to pay on time when institutions are less effective at punishing default, confirming the existence of some strategic behaviour.     

Infrastructure,returns to scale and sovereign debt

This paper explores the nexus between the issue of sovereign debt and investment in infrastructure, emphasizing the case of economies of scale. The focus is on debt contracts that are incentive compatible. It is shown that public and private financial institutions may need to lend amounts above some threshold to force the borrowing sovereign to take full advantage of any economies of scale that may be present. Low levels of lending may or may not result in default. Sufficiently high amounts of lending may be needed to ensure repayment and may prove to be mutually beneficial.     

企业投融资互动机制下的信贷违约风险——基于中国上市公司的实证研究

本文以中国上市公司为样本,实证分析了在负债融资与投资决策相互作用的机制下企业信贷违约风险的变化规律.实证结果表明,整体上投资支出会促进信贷违约风险,负债融资会对其产生抑制;在负债融资导致的过度投资情形下,企业投资对信贷违约风险的促进作用将更明显,而过度投资会抑制企业最优负债融资水平,从而带来更低的最优信贷违约风险;短期负债融资会促进企业信贷违约风险的增加.文章为信贷违约风险控制探寻了一种从企业微观财务决策角度进行分析的全新视角.     

Unexpected Consequences of Ricardian Expectations

The Ricardian equivalence thesis maintains that, given the time‐path of government spending, a change in taxation does not alter the set of feasible lifetime consumption plans of the households and affects neither the demand for commodities and services nor the rate of interest, provided the households act rationally. This note establishes that the very expectations the thesis proposes (‘Ricardian expectations') are invalidated if households act rationally. The divergence from Ricardian equivalence is traced to the omission of interest payments on public debt as part of the households' disposable income. The non‐equivalence is valid in a wide class of models.     

Credit card usage and consumer debt burden of households

The primary objectives of this study were to examine changes in credit card usage and the amount of debt between 1982 and 1986 and to identify factors influencing the amount of and changes in consumer debt held by households. Personal interviews were completed in 1982 and again in 1986 with the money managers of households in a small midwestern town in the U.S.A. The sample consisted of the 123 households that were represented both in the 1982 and 1986 surveys. Paired-samples t-tests were used to identify changes over time. Significant differences were found between 1982 and 1986 total household assets and total amount of debt. Regression analysis indicated that significant predictors of the amount of consumer debt burden were age, net income, total assets, and the degree to which managers felt comfortable with debt. Younger money managers were more likely to make larger monthly debt payments and have more consumer debt. Households with larger incomes and higher levels of assets also had higher total debt. Significant predictors of change in debt burden over the 4-year period were change in net income and total assets, with year-end savings being negatively correlated with consumer debt.     

Objective measures as a predictor of late payments by high‐risk borrowers

Manufactured homes (also known outside the US as prefabricated homes) are a viable housing option for low‐income buyers, but traditional mortgages are not available for purchase of manufactured homes because of a perception of higher risk of default among purchasers of manufactured homes. Research suggests that creditscoring models which incorporate objective data such as income, debt‐to‐income ratio and credit history result in an accurate and objective predictive tool to estimate likelihood of late payments and default among traditional home buyers. This study showed that these same models can be applied similarly to purchasers of manufactured homes. A Tobit model was developed to evaluate which factors most accurately predict default and late payment behaviour among borrowers who purchased a manufactured home. The model showed that when decomposed into the probability of making a late payment and number of late payments, credit score and income are both significant predictors in both sets of borrowers of both the probability of making a late payment and the number of late payments. The higher the credit score, the less likely the borrower is to make a late payment.     

Only the lonely? The influence of the spouse on the transition to self-employment

Previous research showed that married individuals are overrepresented among the self-employed. Few studies proposed skill-spillover between the spouses within the marriage as an explanation. This paper deviates from the previous research by exploring different relationship contexts (e.g., cohabitation, being married or divorced, a widow(er) or single) and the role of partner influences under these contexts. It argues that the interaction between gender and relationship status implies variation in not only resources but also constraints, and hence sorts individuals into two different types of self-employment: entrepreneurial self-employment (i.e., incorporated business) and unincorporated self-employment. Using “Panel Study of Income Dynamics (PSID) 1965–2005” data, results of the competing risk models show that marital status contributes to both types of self-employment transitions, especially for men, but also for women. Cohabitation is a less supportive context for entrepreneurship and a partner’s self-employment experience increases only women’s likelihood of entering into entrepreneurship. These results suggest that skill-spillover between partners might be context dependent and only in one direction (from men to women).     

Sovereign defaults: Information, investment and credit

Why would a sovereign government, immune from bankruptcy procedures and with few assets that could be seized in the event of a default, ever repay foreign creditors? And, correspondingly, why do foreign creditors lend to sovereigns? This paper finds general conditions under which, even in the absence of sanctions, lending to sovereigns can emerge in a single shot game. Furthermore, it shows that positive borrowing can be sustained both in pooling and separating equilibria. In this way, it makes clear that neither sanctions nor reputation considerations, the two classical explanations, are necessary to enforce repayment. Information revelation is the crucial mechanism for these results. The repayment/default decision is interpreted as a signal used by the government to communicate information to domestic and foreign agents about the fundamentals of the economy. Governments repay to affect agents' expectations about them. A default, through its effect on expectations about fundamentals, can generate a decline in foreign and domestic investment and a credit crunch in domestic credit markets. Governments repay to avoid these costs, but may default (in equilibrium) when hit by a negative shock.     

Debt as a source of financial stress in Australian households

This paper examines the role of demographic, socio‐economic and debt portfolio characteristics as contributors to financial stress in Australian households. The data are drawn from the most recent Household Expenditure Survey and relate to 3268 probability‐weighted households. Financial stress is defined, among other things, in terms of financial reasons for being unable to have a holiday, to have meals with family and friends, to engage in hobbies and other leisure activities, and general money management. Characteristics examined include family structure and composition, source and level of household income, age, gender and marital status, ethnic background, housing value, debt repayment of various types and credit card usage. Binary logit models are used to identify the source and magnitude of factors associated with financial stress. The evidence provided suggests that financial stress is higher in families with more children and those from ethnic minorities, especially when reliant on government pensions and benefits, and lower in families with higher disposable incomes and housing values. There is weak evidence that Australia's historically high levels of household debt cause financial stress.     

Changes in factors influencing consumer debt among Scottish families, 1984—1987

The major objective of this study was to determine socio-economic and debt management factors causing debt problems among Scottish families. Data for this study were collected from the records of the debt counselling segment of the Citizens Advice Bureau in Glasgow, Scotland, during 1984–87. The final sample consisted of 404 cases selected at random. Variables selected for the study included the following socio-economic characteristics: sex, household size, marital status, employment status, sources of income, and total income. Debt variables included in the study were total debt, sources of debt, amount of debt from each source, and total monthly debt payment. Total debt owed by debtors increased by 283% over the 4 year period from 295,113 in 1984 to 836,409 in 1986. The majority of the households had debt to income ratio of 0.50 and on the average owed on eight different types of loans. The largest proportion of debtors (87%) borrowed from finance companies and the largest sums of total debt were also owed to finance companies (52%). Finance companies consistently held this position over the 4 year period. The analysis of variance (ANOVA) results indicate that employment status, number of sources of borrowing, marital status and sex significantly explained the variation in total debt burden. The number of sources is an important factor in debt management. As the numbers of sources of borrowing increases, not only the management of transactions gets complicated and one can easily lose sight of total debt burden, but it also indicates that people start borrowing from high cost sources of borrowing, such as store credit and finance companies. Educators need to emphasize the importance of the variation in cost of borrowing related to various sources in their materials, and these educational efforts should be targeted to females, singles and those who are recently separated and divorced.     

Consumer Bankruptcy: A Right or a Privilege? The Role of the Courts in Establishing Moral Standards of Economic Conduct

The Norwegian Consumer Bankruptcy Act was passed 17 July 1992 to give persons with "serious debt problems (. . .) the possibility to gain control over their economy." The Act contains provisions for negotiations between the debtor and the creditors, for court rulings on repayment plans, and for a discharge of the debts not covered by the plan. The origin of the Act was a social welfare approach to the problem of overindebtedness. However, the Act embodies an inherent contradiction in that it also includes moral elements in order to prevent it from exerting a negative influence on the perceived obligation to pay one's debts. This contradiction has given the courts a wide scope of discretion in the application of the Act. As a result, cases are treated differently in different jurisdictions. Some judges put more emphasis on moral evaluations than others. This situation also gives room for strategic action from creditor groups who typically are repeat players in cases of consumer bankruptcy. In this way the more objective, social welfare approach of the Act is undermined.     

Bank lending,misleading signals,and the latin american debt crisis

This article explores the microfoundations of bank and borrower behavior in the Latin American debt crisis. In the model developed, less developed countries attract loans by signaling their ability and willingness to pay. Some of the signals are “coercive” because they indicate that if income targets are not met, income will be redistributed in order to honor debt obligations. Implicit in such coercive signaling is the borrower's expectation that redistribution will not damage economic productivity. A coercive signal is misleading when feedback effects on social stability and work effort—and thus on the ability to pay—are underestimated or ignored; in this case, it inaccurately predicts repayment prospects. We estimate two equations: (1) private lending to Latin borrowers as a function of our specified signals, and (2) the probability of payments problem as a function of the same set of signals. The results support our borrowing model: coercive signals do enhance lending, and at least one of these signals is misleading.     

News and sovereign default risk in small open economies

This paper builds a unified model of sovereign debt, default risk, and news shocks. News shocks improve the quantitative performance of the sovereign default model in a number of empirically-relevant dimensions. First, with news shocks, not all defaults occur during downturns. Second, the news shocks help account for key differences between developing and more developed economies: as the precision of news improves, the model predicts lower variability of consumption, less countercyclical trade balance and interest rate spreads, as well as a higher level of debt in line with more developed economies. Third, the model captures the hump-shaped relationship between default rates and the precision of news obtained from the data. Finally, the news shocks have a nonmonotonic effect on welfare.     

Inflation and Default Dynamics

Changes in inflation, particularly if they are sharp, can have important consequences for nominal contracts, especially debt instruments such as fixed-rate bonds. This paper examines the intricate dynamics of inflation and defaults. The experience of the United States during the past four decades is subjected to empirical analysis to examine how the nature of the relationship changed as we shifted from a high inflation to a low inflation regime. The paper is organized as a three-part study. We initially examine the U.S. default experience, as summarized in Moody's speculative grade default rate, along with industry differences. The paper then scrutinizes U.S. inflation dynamics as seen in different summary measures of the general price level and delves into pricing power issues. The study proceeds to examine co-movements in the inflation and default series from a theoretical and empirical standpoint and the results confirm the intuitive postulate: higher the inflation rate, the more pricing power companies have; greater pricing power leads to, better earnings and repayment abilities for firms and a lower incidence of defaults.     

Currency Boards and Debt Traps: Evidence from Argentina and Relevance for Estonia

This paper analyses the November 2000 liquidity crisis that brought Argentina near default on its foreign debt. The main purpose of this paper is to assess whether this crisis may be taken as a warning signal for Estonia, given the similar exchange‐rate system shared by the two countries. It seems that with a low level of public debt and a balanced budget, Estonia will not face a similar liquidity crisis as its Latin American counterpart, which remained heavily reliant on foreign borrowings. But the substantial real exchange‐rate appreciation of the kroon under the Currency‐Board Arrangement has resulted in serious external imbalances, which will need to be corrected to avoid balance of payments pressure and reduce Estonia's high dependency on the level of foreign direct investments.     

Sovereign default and debt renegotiation

This paper develops a small open economy model to study sovereign default and debt renegotiation for emerging economies. The model features both endogenous default and endogenous debt recovery rates. Sovereign bonds are priced to compensate creditors for the risk of default and the risk of debt restructuring. The model captures the interaction between sovereign default and ex post debt renegotiation. We find that both debt recovery rates and sovereign bond prices decrease with the level of debt. In a quantitative analysis, the model accounts for the debt reduction, volatile and countercyclical bond spreads, countercyclical trade balance, and other empirical regularities of the Argentine economy. The model also replicates the dynamics of bond spreads during the debt crisis in Argentina.     

Decentralized borrowing and centralized default

In the past, foreign borrowing by developing countries was comprised almost entirely of government borrowing. However, private firms and individuals in developing countries now borrow substantially from foreign lenders. It is often asserted that this surge in private sector borrowing generates excessive borrowing and frequent sovereign defaults in developing countries. This paper analyzes the impact of decentralized borrowing using a quantitative model in which private agents decide how much to borrow and the government decides whether to default. Relative to a model in which the government determines both the level of borrowing and whether to default, decentralized borrowing drives up aggregate credit costs and sovereign default risk, and reduces aggregate welfare. Interestingly, decentralized borrowing may lead to either too much or too little debt in equilibrium depending on the severity of default penalties.     

Sovereign debt as a contingent claim: a quantitative approach

We construct a dynamic equilibrium model with contingent service and adverse selection to quantitatively study sovereign debt. In the model, benefits of defaulting are tempered by higher future interest rates. For a wide set of parameters, the only equilibrium is one in which the sovereign defaults in all states; additional output losses, however, sustain equilibria that resemble the data. We show that due to the adverse selection problem, some countries choose to delay default to reduce loss of reputation. Moreover, although equilibria with no default imply greater welfare levels, they are not sustainable in highly indebted and volatile countries.     

Debt Judgments as a Reflection of Consumption-Related Debt Problems

In connection with the strengthening and enlargement of financial markets, i.e., financialization, financial services and products play a major role in the everyday lives of consumers. One drawback of this trend is the increase in the number of debt problems. The data used in this article consist of Finnish district-court judgments related to debt that in most cases was consumption-related, and register-based data on debtors. We first compare debtors to the entire population of Finland by age, gender, marital status, and education, and also in different age groups. The focus then turns to the four most common types of debt in the judgments (based on consumer credit, operator services, distance selling, and credit card debts), and how age, gender, marital status, and education related to these debt types. According to the results, consumers under 30 years of age, in particular, men, those with a basic level of education, and the divorced were over-represented in the data, compared to the overall Finnish population. Young single adults were particularly likely to have accrued smaller amounts of debt related to instant loans and operator services, whereas more extensive consumer credit as well as credit card debt tended to be a problem among retirees. Credit card debt, as well as debts to lending firms, were more common among those with tertiary education than among those with a basic education. Overall, the adverse effects of financialization focused especially on young people with a low level of education. The results also indicate that legislation could partly reduce the negative effects of financialization.