But it’s more likely that the state’s notoriously dysfunctional legislature will unite far before that point and pass desperately needed tax hikes to raise revenue.īut not all munis are backed by the full faith and credit of the state. This means that a state like California could one day see 100% of its budget go to servicing its debt. But even then the state would still be mandated to pay its bondholders. Of course, a state could breach one of its covenants and go into technical default, if, for instance, the state’s debt to GDP ratio reaches a certain threshold. Many states have covenants mandating that the state pay its general obligation bonds first before anything else. That means it comes before paying for education, pensions, state worker salaries, transportation and the thousands of entitlement programs in the state’s budget.Ĭalifornia is not alone. A large portion of California’s debt is in general obligation bonds, which are mandated to be paid first before anything else in the state – period. California’s inability to deal with its fiscal troubles has some economists likening it to one of the troubled nations in the eurozone, like Greece or Ireland.īut states are not people or corporations - they cannot declare bankruptcy. That is not to say that there aren’t some muni bonds that look sketchy. While it is easier to think of the muni market as this large monolith, that is actually far from reality. Lumping this highly diverse market together and making a judgment call on its future is sort of like lumping the entire stock market together and saying that all US companies are in trouble. They also tend to be hyperlocal, with many tied to specific assets like toll roads and hospitals. There are over 60,000 different bonds that make up this $2.8 trillion market, each with their own terms, risks and maturities. Whitney, who gained recognition in the early days of the financial crisis by accurately predicting that Citigroup (C) would have to slash its dividend to conserve capital, believes she is again ahead of the curve in predicting troubles for the muni market.įirst, the muni market is hardly a fungible commodity market like oil or gold. Now Wall Street analyst Meredith Whitney has managed to add even more fuel to the fire, suggesting on national television this past Sunday that the market was set to experience billions of dollars of crippling defaults within the next 12 months. Investors sent prices down even further this month after it became clear that Congress would not be extending the Build America Bonds program. The excitement in munis first started in November, after prices took a steep dive as the government began its second round of quantitative easing. But the recent selloff in this normally sleepy but important corner of Wall Street may be a bit overdone, as fears of cascading defaults look remote. In the past two months, the $2.8 trillion municipal bond market has gone from being one of the most boring and predictable markets to one of the most volatile and talked about – it even made it onto 60 Minutes this week. By Cyrus Sanati Meredith Whitney sees doomsday ahead.
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