Illinois Fiscal Trap: Lousy credit! And now reputation risk premium Illinois credit rating is the lowest in the nation. And just like for a consumer car loan, Illinois low credit rating makes it considerably more expensive to borrow money in capital markets when the state needs to undertake long-term spending on roads, bridges, schools and so forth. But beyond this low credit rating, some bond market observers claim that Illinois pays interest rates on its debt that are higher than the actual default risk that these ratings are designed to reflect. That is, Illinois has a “reputation risk premium” in its interest rates over and above the “default risk premium” that its credit rating captures. The reputation risk premium is likely the result of some bond investors view that state of Illinois debt is “toxic,” causing them either to avoid holding Illinois bonds altogether or to demand significantly higher interest rates on such debt.
Posted on: Wed, 12 Mar 2014 10:49:30 +0000
Trending Topics
Recently Viewed Topics
© 2015