Monday, January 17, 2011

Municipal Bond Market In Trouble

The municipal-bond market's assumption is that cities and states won't default on their debt because they need to keep selling bonds to build roads and bridges. Investors will keep buying munis because they think the state will always make good on its obligations (and with the added incentive that these bonds are free of state, local and federal taxes).

But suppose taxes are so high that people leave cities or states in droves, depleting the pool of revenue need to pay bondholders? Suppose these states have so many other obligations -- from federal mandates, massive "guaranteed" pensions to government workers and more -- that they can't or won't make the vast cuts needed to keep paying on their bonds?

...Prominent banking analyst Meredith Whitney (who accurately predicted the banking crisis in late 2007) recently warned that 50 to 100 municipal-bond defaults will happen over the next year, likely amounting to more than $100 billion in defaulted debt. _NYP
Maybe so, maybe not. Obama will want to bail out municipalities which are particularly tight with public sector unions, at the very least. But then, with the US government under Obama losing its international credit reputation, the US government may not be in a position to bail out anyone soon.

The ways of profligate big government spenders is the way of ruin, sooner or later. Perhaps sooner would be better, so we could take out the garbage and get busy re-building in a smarter way.

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