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Muni Bond Crisis Can Only Deepen
We often disparage the Wall Street Journal for being too spineless to tell it like it is when reporting on the state of the economy, but with last Friday’s lead story, New Hit to Strapped States, they pulled no punches. You can almost pick a paragraph at random and get a sense of how serious the cities’ credit problems are. This paragraph, for instance “Municipalities borrowed $122 billion of variable rate demand debt in 2008, roughly twice the amount of these types of loans borrowed the year before…” How did they get in so deep? The answer lies in the way they navigated the shoals of 2008. While most muni-bond debt is long-term, scads of jerry-rigged credit deals were struck that year to get municipal borrowers past the crunch. For the most part, this involved the use of so-called letters of credit – guarantees by large banks to backstop municipal borrowers when they were having trouble raising cash via bond auctions. Under the circumstances, noted the Journal, “Many municipalities scrambled to convert the debt into other instruments, including variable-rate demand obligations, which are long-term bonds with interest rates that reset periodically. For a fee, big banks guaranteed many of these deals.”
Now, the letters of credit are expiring, and although borrowers must have believed in 2008 that it would be easy to renew them a few years hence, this has not proven to be the case. In fact, if banks are willing to issue letters of credit at all, it is at prohibitively steep premiums. For municipal borrowers, the only alternative is to pay increasingly punitive auction rates at a time when they are struggling just to pay their bills. On Friday, those rates hit 5.01 percent for 30-year, Triple-A general obligation bonds, reflecting a ratcheting up of perceptions of risk. A notable casualty was a New Jersey agency that had to reduce the size of a bond issue by about 40%, and to pay a higher rate, because of soft demand.
Fed Has No Control
The Journal story stopped short of saying the cities are effed, but the implication is unavoidable. After all, this is not a market that the Fed can control, and it therefore seems entirely predictable that market forces will continue to raise the risk premium on municipal borrowing, even as cities struggle to balance budgets with a combination of job and spending cuts and tax hikes. You don’t have to be an economist to see that that those supposed remedies won’t work – that they will only energize a deflationary spiral that eventually will push hundreds of cities into bankruptcy before the furies are spent.
Meanwhile, this is one potential bailout that the Fed cannot propagate in the usual make-it-up-as-we-go-along way. That is notwithstanding the fact that the very phrase “Fed bailout of cities and states” crops up almost casually in news stories about mounting budget crises at all levels of government beneath the Federal. But we should be perfectly clear about what it implies; for even the mere hint that the Federal Government is considering backstopping cities and states could trigger a run on the dollar so violent as to topple the entire global house of cards.
In the meantime, not only is the credit crisis for cities and states not about to go away, it can only intensify as the year wears on. For that reason, we have trouble believing that 2011 will pass without a crisis of such severity that it will make us fondly recall 2008.
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No bondholder is willing to take a haircut, even though the only other solution would appear to be just to remove the entire head.
(Note: For disclaimer purposes, I must admit that I own stock in Guillotines 'R Us)
Cut essential services: police, firemen, teachers, street lights. With increased crime, empty and foreclosed houses, higher taxes, what is going to stop the decline? They say the poverty rate in Camden is 50%. Many of those who do pay the taxes have the option to move. Will this cause a migration of the "haves" to a less debt ridden city, county or state? Will the "have nots" be left with even less? Maybe this will be the next migration pattern.
Oh yeah, that was the BABs program.
QE for the munis? Bennie lends the banks money for nothin and they buy the paper.
What? The municipalities dont have any bread? Why, let then eat shit and die motherfuckers. Thank god the republicans have in no uncertain terms said no bailout even if it means municipal bankruptcy. Socialists deserve no better. Gold plated pensions and health benefits need to go. We cant have50 percent of municipal income go to health and retirement benefits.
The WSJ will be honest if that honesty results in more pressure to cut muni-workers pay/benefits.
I'd say the proles are getting restless.
AFL-CIO protesters attempt to break up MBA conference
The muni crisis will go away with QE3. I continue to buy HYD (High-yield muni's)
I continue to buy munis as well (Texas General Obligation bonds). I consider them to be more secure than US Treasuries.
this is probably a good investment, though u are probably early
Yeah i hate you motherfucker cause you are probably right. Take that as a compliment from the troll....
Smartest comment on this post.
thats what bill gross was doing front runnin the fed on treasuries, buy low sell high to the fed. Now only problem is if/when they buy r they gonna play favorites(what state to start in) then r the states gonna sell new bonds directly to the fed(thats gonna be blatant monetization) fed likes to hide its squidly arms. so i would say its not likely they gonna do it that way they just gonna continue givin loans to the states
Fading PIMCO is lethal. Right or wrong on QE, I think the price is right on the risk.
I'm seeing states hiking taxes, cutting services and pushing problems off state books and onto community books.
In CA, the State is putting back more and more financial irresponsibility on the municipalities, while looting their redevelopment coffers. The big question is how much completed municipal redevelopment was financed on the presumption of a continuing redevelopment revenue stream.
The local electeds are screaming bloody murder, so the deficiency must be huge.
Governments cannabalizing their smaller offspring is an ugly scene.
Rainman,
"The big question is how much completed municipal redevelopment was financed on the presumption of a continuing redevelopment revenue stream."
CA redevelopment works like this:
1) A redevelopment project area is created and a project area plan is adopted
2) A base year of assessed value is established -- this is the assessed value before the redevelopment takes place.
3) As assessed value increases, bonds are issued, to be repaid by the tax increment -- that is: the tax generated by the increase in assessed value over the base year.
There is no increase in taxes, it is merely a carve out of existing taxes. That's why the bonds are call Tax Allocation Revenue Bonds.
Once these bonds are issued, the obligation to repay the bonds cannot be abrogated by law (except by a bankrupcy court). If the governors proposal is enacted, the bond liabilities and all other contractual liabilities will be inherited by the "successor agency." This may be the City or County, or some newly created type of agency. The tax increment pledged to the bonds cannot be touched until after bond holders are paid.
Remember when Pete Wilson was gov in CA and it was still a semi-sane place. All pols suck but liberal Dems are pure evil.
Right on rainman and I agree with other posters here that CA State (not particular muni) obligations are a buy. And that there will be weeping and gnashing of teeth. It's already started.
"But we should be perfectly clear about what it implies; for even the mere hint that the Federal Government is considering backstopping cities and states could trigger a run on the dollar so violent as to topple the entire global house of cards."
Sorry, but no. You could have said the same about The Bernank openly monetizing US government debt. I don't know what will precipitate the phase change collapse of Treasuries and the dollar, but the Fed bailing out cities and states will not be the proximate cause, and it's a virtual lock that it will happen.
Nothing that can't be kicked down the road via a little QE 3.0 and the restoration of backdoor subsidies via the BAB program.
There are topics that apparently cannot be discussed in America. Bondholder pain is one of them. Intelligent triage to ascertain who can be saved and who cannot is another one. This guarantees that absolutely nothing will happen until the checks begin bouncing.
Meredith Whitney right or wrong? she has been getting hammered in the press, but i believe she is correct.
I tend to agree with you. Then again we should not forget that in January 2010 she confidently predicted that the financials would be toast in the 3rd and 4th quarters of 2010. I believe that was one of the better 6 month runs for the sector.
sunny
predictions r a mutha fucker, predicting what will seems a little easier, than predicting when, cuz with the what your seeing the data but with the when your not
Leonard Cohen has summed it all up here......
http://www.youtube.com/watch?v=q63plx5NClI
replacing 1 problem 4 another would not help. this is wonderful. lets watch the govt crumble.
http://covert2.wordpress.com