S&P downgraded Meredith Whitney yesterday.
OK, that’s not technically accurate. What they did was revise California’s credit rating outlook from ‘negative’ to ‘stable’ following the successful completion of a budget.
The budget was the state’s first on-time one in 10 years.
What makes California’s budget (and New Jersey’s pension deal, and New York’s budget, etc.) so damaging to the Meredith Whitney thesis is not just that they got done, it’s what they show: Spending cuts are actually plausible.
A key tenet of the bear thesis is that politicians won’t have the stomach to prioritise the interest of bondholders over domestic interests (state unions, workers, retirees, etc.). One problem with this was that bondholder interests have never been that huge (as a percentage of state payments). And now it’s clear that pain can/will be inflicted on local interests.
That being said, the austerity hurts, so the revised Meredith Whitney thesis — that the main threat from the muni problem is the economic drag — may still have some merit.