Damade Gaxelili Tvali

Rating Methodology

December 2008

Contact

Toronto

Phone

1.416.214.1635

David Rubinoff Sean Marion

New York

Yves J. Lemay Jerome Fons Steven Hochman Debra Roane Jose Alberto Molina Laura Barrientos

Milan

1.212.553.1653

Mauro Crisafulli Massimo Visconti

London

39.02.5821.5350

Ilona Dmitrieva Sebastien Hay Simone Zampa Thomas Amenta

Tokyo

44.20.7772.5454

Tomomichi Nagaoka Elisabeth Rudman Yuka Tamba

Mexico City

81.3.5408.4000

Eduardo Antonio González 52.55.9171.1817

The Application of Joint Default Analysis to Regional and Local Governments*

Summary

This special comment outlines and explains Moody’s application of the joint-default analysis (JDA) methodology to regional and local governments (RLGs)1 outside the United States2 — a process that will affect roughly 250 governments in 30 countries3. The application of the JDA methodology presented here represents an elaboration and systemization of Moody’s existing approach to rating RLGs. Moody’s ratings of RLGs have long reflected an implicit assessment of the likelihood of extraordinary support by a higher-tier government to prevent a default by an RLG. The JDA methodology makes this assessment explicit and specifies the analytic inputs behind this approach. The application of JDA to RLGs explicitly accounts for: a) an assessment of the baseline–or stand-alone–credit risk of an RLG; b) the supporting government’s rating; c) an estimation of the default dependency between the two entities; and, d) an estimation of the likelihood of government support. While this special comment provides an overview of these four analytic inputs, with a particular emphasis on the determination of default dependency and the likelihood of government support, it should be read in conjunction with "Moody’s Rating Methodology: Local and Regional Governments Outside the US”,

1. 2. Regional and local governments (RLGs) refer to entities possessing revenue raising capacity that are responsible for...