I’ve been talking about the municipal bond crisis scenario since 2009, after Vallejo California declared bankruptcy in 2008. The city has yet to emerge, and is still reeling from unfunded pensions and plummeting property tax revenue.
As states and cities face huge shortfalls in meeting budgets and pension payments, some politicians are just intent on making things worse.
As things stand, the states would be rescued by the Federal government, because states as sovereigns cannot declare bankruptcy.
Default is impossible, by constitutional decree in most cases. So a jaw dropping debt default by California or Illinois should be staved off, right? Wrong.
Legislation is being introduced that would allow U.S. states to file for bankruptcy. It’s not enough that trouble is brewing in the municipalities – in California, in Michigan, in Florida, and of course, the bankrupt New Jersey. Republicans are intent on letting states go bankrupt too.
“We’re faced with the danger that the states are going to try to show up and say to Washington: You have to give us money. And I think we have to have an alternative that allows us to say no.” – Newt Gingrich (quickly emerging as our generation’s Herbert Hoover)
Don’t they realise that state bankruptcies would certainly kill any global recovery? Didn’t everyone learn from Lehman going under? Now they are willing to let whole states go bankrupt. Just the effect on state credit ratings, or the effect on current bondholders’ psyche will be enough to hasten the crisis.
It’s sad, because muni debt usually is so boring. Local governments honour their debts, and pay very little interest. Through the economic thick and thin, municipalities pay up because they fear losing access to money. But now, cities are suffering – Detroit has cut police and sanitation, New York City doesn’t have the man power to respond properly to repeated snowfalls. The $3 trillion municipal market will be easily as big a crisis as the Euro Zone crisis, and that’s not even counting any state default. Most people think the Federal government would bail out states, and avoid financial crisis. Think again.
This post originally appeared at HiddenLevers.