Meredith Whitney fell out of the spotlight after everyone tore to shreds her prediction of muni doom.
Q: You have said that there could be 50 to 100 sizable defaults that could amount to hundreds of billions of dollars. Could we still see defaults?
A: Yes. This will be an extended multiyear issue. You will see defaults. You have debt that’s just not backed by ample cash flows, ample revenue. You’ve got too many drains and demands on state revenue. I’ve never said that a state would default, but I think the local municipal bonds are at a significant risk of default. Ultimately, a legislator is going to have to decide between the bondholder and their constituents, i.e., paying the police force or paying the bondholder. The local governments have decided they’re going to pay their police force, their firemen, their trash collectors. Some of the project finance bonds that have gone to back entities should never have been backed by tax-exempt municipal bond paper. Hotels, sports arenas, etc., project development bonds, don’t have the revenue to back up the projects.
Whitney says deficit hawk politicians are lessening the crisis:
Every day things get better because politicians are addressing the fiscal challenges more aggressively. Since November you’ve had more governors take strong austerity measures. The reality is that states have simply been spending far more than they’ve been taking in. In many cases, states have spent over two times the tax revenue they’re taking in. Of course, that’s not sustainable because they run down their rainy day funds, which they had previously used to balance misbudgets on a year-to-year basis. They don’t have any wiggle room today. But every day the situation gets more focused, and that means it’s closer to finding a fix.
The crisis will hit in the second half of the year:
You don’t have a lot of bad news through May and June. And then you have some real challenges coming after June as housing starts to decelerate again as foreclosures resume and inventory really comes on the market. Investors who are looking for a strong second half may be disappointed. You may see a repeat of what happened last year. And inflation is a real issue. But for the next couple of months the markets should continue to do well. The more we can do to address fiscal austerity, the better our markets will do, and there is a real political shift to doing that.
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