More Cities Will Default on Bonds

April/05/2011 17:04PM
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Meredith Whitney, A Wall Street wizard who called the banking crisis early, is expecting 50-100 municipal defaults in the near future. Ms. Whitney says states won’t default, but more cities will. They will have to choose between paying the bondholder and paying the police and firemen. The built-in escalators in their contracts will more than offset any revenue increases. Many cities have already raised property taxes as much as they can(no kidding).

Combine this with the fact that over a quarter of homes have negative equity. Housing inventory remains high. Down payments are way up. The foreclosure moratorium that hit in November and December just delayed the foreclosures that will come in the next few months.

Michigan is talking about collapsing school districts, collapsing municipalities, and sharing services. All things that need to be done. Deleveraging is going to happen and it will affect municipal debt.

A lot of so-called smart money has realized this and deleveraged from the most vulnerable states and cities. New bond issues are getting harder and harder to sell and require more and more interest escalation.

The housing problem, like most problems in this country today, has been kicked down the road. Media feeds on the housing problems like they used to feed on the farm problem, remember Farm Aid? They run human interest stories suggesting the banks and government have an obligation to keep people in homes when they can’t make payments. Cities cut revenues for schools, police, and fire first, knowing the media will create a backlash. But, when it’s all said and done, there will be resolutions. And, in some cities, that resolution will be a default on their bond obligations. Just like the bondholders at Chrysler and GM took it on the chin, so will those who hold municipal bonds.

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