Private sector credit risk predicts state government default risk.
The study looked at how likely U.S. states are to default on their debts by using information about companies' default risks. By connecting private sector risks to state government risks, they found that market expectations of company credit quality can predict state credit quality. The study showed that when private sector credit risk goes up, state credit risk also tends to increase. This means that understanding how companies are doing financially can help predict how states might struggle with their debts.