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Here's What Happens When Your City Is Cut To Junk
We’ve spent quite a bit of time recently discussing the fiscal crises facing many state and local governments across the US. There are quite a few explanations for the deteriorating financial situation ranging from falling oil prices to outright fiscal mismanagement.
One persistent theme is grossly underfunded pension liabilities. The most dramatic example of this problem is Chicago, whose debt was cut to junk by Moody’s after an Illinois State Supreme Court decision struck down a pension reform bid, complicating Mayor Rahm Emanuel’s efforts to push through similar legislation in Chicago where, as we’ve shown, the budget gap is set to triple over three years thanks to rising pension liabilities.
The Moody’s downgrade triggered some $2 billion in accelerated payment rights for creditors and also complicated Emanuel’s efforts to refinance $900 million in floating rate notes and pay down $200 million in related swaps. This underscores how a ratings agency downgrade can quickly cause a chain reaction that is self-feeding and can further imperil already beleaguered city finances. Citi has more on the “ratings agency feedback loop”:
Via Citi:
How does a downgrade create a feedback loop?
Payment induced liquidity shock
For many issuers’ credit contracts, a drop to a speculative grade rating acts as a payments trigger. For instance, the issuer may have commercial paper programs and line of credit agreements as a part of its short term borrowing program and a rating downgrade could qualify as an event of default for these borrowing arrangements. This enables the banks to declare all outstanding obligations as immediately due and payable.
A rating downgrade could also force accelerated repayment schedules and penalty bank bond rates on swap contracts and variable-rate debt agreements.
Thus, as a result of the rating action, an issuer could face increased liquidity risk at an unfortunate time when it is working to navigate its way out of a fiscal crisis.
Knock-on rating downgrade risk
In some instances, rating agencies may disagree on an issuer’s creditworthiness which could result in a split level rating for a prolonged period. But a drastic rating action by one main rating agency (either Moody’s or S&P) which knocks the issuer’s debt to below investment grade could force the other rating agencies to follow with a similar downgrade. While the other rating agencies might feel that underlying credit fundamentals of the issuer do not merit a sub-investment grade rating, their rating action could be dictated by negative implications due to the liquidity pressures posed by the first downgrade to junk status. Recently, S&P downgraded a credit as a result of Moody’s rating action that stated that its rating action reflected its view that the issuer’s efforts “are challenged by short-term interference” that prevents a solid and credible approach to resolving their fiscal problems.
Shrinking buyer base
Many investors have mandates to buy investment grade debt only and a fall to speculative grade status could cause existing investors to liquidate the holdings of the fallen credit and shrink the universe of buyers.
Rising issuance costs
In many cases the issuer may have been working diligently to reduce its exposure to bank credit risks in the event of a ratings deterioration (for e.g. shifting its variable-rate GOs and sales tax paper to a fixed rate by tapping its short-term paper program then converting it into long-term debt) but the unfortunate timing of the downgrade will make this task much more challenging as a shrunken buyer base for an entity’s debt, quite naturally, translates into a higher cost of debt.
A higher cost of debt exacerbates liquidity problems and thus the feedback loop could continue to gain traction.
To demonstrate just how pervasive the underfunded pension problem truly is, consider the following map:
* * *
We suppose it's only a matter of time before a wave of officials go the extend-and-pretend ponzi route by issuing pension obligation bonds to paper over holes while doing nothing to solve the underlying problem ensuring that the cost to taxpayers will eventually be even larger than it would have been in the first place.
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Rising cost premium, bitchez
We all think societal collapse, rampant looting to survive, chaos and death are going to happen at the citizen-level. I submit to you that it might happen at the municipal government level.
After all, they're about to start cannibalizing their own citizens (even more so than currently). I'd say that counts.
You could well be on to something there. No matter what sort of crisis erupts, however, "continuity of government" (COG) is the first item on the planned agenda of recovery.
Could you be more obvious? FFS
Perhaps. The Feds can simply print more money. States and munis, not so much.
And thus the Feds continue to take over state and local governments. So much for self-rule.
About to start?
You must live in a nice place.
In this low crime area, since most residents are poor and law abiding, the state and local authorities have passed many Malum Prohibitum regulations. And they enforce them without mercy.
Every infraction gets ticketed or arrested -- no exceptions. They over charge you if they can -- almost half of all speeding tix get 'reckless driving' tacked on now, when for the last 3 years I've been watching it, that was only done in rare cases. You get a speeding+reckless ticket you're looking at $400 in fines plus increased insurance.
Checkpoints (revenue harvest operations) are common and becoming moreso. It's not safe to have even one drink with dinner here and drive home. The cops here give people DUI with 0% BAC. You see, they can say "officer's discretion", say you were impaired (I smelled alcohol/marijuana your honor), order a blood test (that takes two years to come back from the state crime lab), set your court date a few months after your infraction, then tell the judge you were impaired. Since you can't get your blood work back, it's your word versus the blue hero's word.
And I can tell yo uthat the judge always sides with the blue hero.
Since the local/state govs cannot print money, they have only one remaining avenue to get money. That is to point their guns at us, declare us criminals (even though mens rea doesn't exist), and demand payment, or else they'll beat, incarcerate, imprison, or kill you -- depending on how much you talk back or resist.
Pay up, or else. Mafia protection rackets wish they could work like this. These lard assed inefficient and corrupt 'officials' make Vito Corleone's fictional operation look like a lemonaide stand.
And nobody, I mean nobody, is going to come along and hold these fucksticks accountable for any mistakes or malfeascance. Until the guillotines and gallows come out. We'll just have to be sure to build the gallows extra strong to handle all those 300+ pounders (women especially).
Since the local/state govs cannot print money, they have only one remaining avenue to get money. That is to point their guns at us, declare us criminals (even though mens rea doesn't exist), and demand payment, or else they'll beat, incarcerate, imprison, or kill you -- depending on how much you talk back or resist.
Yes yes Yes. Malum prohibitum is just another vehicle for the social planners to ride to victory of government over liberty.
When fraud is the status quo, possession is the law.
Cut those cities to "junk" status and stop paying all the public servants and those pensioners, go ahead already motherfuckers...
My only thought this last year has been "WHERE in this fine city will the massed protests (and episodes occur?)
Will the 5%ers make noise? The 10?
Dunno. We'll find out eventually.
They will do that, kike in Detroit, but that wont relieve taxes or fees and just make the problem worse with poor elderly on top of poor young immigrants and infrastructure owned by foreigners tax free valued at and carried 400% its current value.
Once your debt reaches a certain level, all this stuff means is that you are rearranging the pieces on the chess board -- but the chess board is still located on the Titanic!
Chess requires critical thinking. Statists are simply playing musical chairs on the Titanic.
http://www.youtube.com/watch?v=v1mQT1u_45I
Not even a sewer smells like a career politician.
"See, if we raise the minimum wage in Chicago for the young workers just starting out in life who will never get a pension from McDonalds, the higher net taxation derived from the increased wage on the younger workers will fund the old geezeers with government pensions. Its a social democracy feed back loop." - Paul Krugman
Colors are hard for S&P. I haven't seen a map screwed up this bad in quite a while.
How about different shades of red for the map?
The map maker needs a promotion! Simply fucking retarded.
Issue Drachma-denominated general obligation bonds. Problem solved.
Rahm's answer to the problem is to build a city run casino. Expect crooked dealers and 'special software' in the poker machines.
Add to that Rauner will approve leagalized Pot soon....Illinois is going to be very hip again soon....corrupt as fuck...but hip!
I sense a new state slogan....
Ya think so? I don't know...it seems about a million times obvious to do it but this is IL politics so that generally means it's a million times obvious it won't actually happen.
If I had a good feeling about it though, S IL would seem to be the weed growing paradise waiting to happen. Maybe some land speculating is in fast order...just give me a sign...a link...a something if ya got it?
Pixies :: Where Is My Mind
http://www.youtube.com/watch?v=ufERJEdcfAY (3:48)
I couldn't care less about Chicago.
Ironic......neither does it's elected officials....
I care because Chicago is already hemorrhaging its wonderful citizens. There is some kind of relocation service moving large numbers to neighboring states. Maybe metastasizing is a better word. My hometown has seen more than its share already, and it is not exactly benefiting anyone. Crime. Violence. Shootings. No thank you.
Until I see a property tax increase there, neither do I.
This is all Meredith Whitney's fault.
Banksters taking over the American states. That'd be called war where I come from.
Chiraq, Shitcago, liberal hellhole! Hopefully this all comes apart on Rahm Emanuel's watch. Never let a good crisis go to waste, hey you fucking asshole?
Chicongo.
In Chicago no one and I repeat NO ONE cares about this right now. Why?
Blackhawks are in the SCF. Nothing else matters!
Will address this MINOR dilemma AFTER the boys hoist Lord Stanley's Cup. (He typed hopefully ;-)
GoHawks.
Year To Date
Shot & Killed: 146
Shot & Wounded: 853
Total Shot: 999
Total Homicides: 172
http://heyjackass.com
Looks like the boyz need some range time to get their kill ratio up. Chicongo.. LOL
Rham will find a way to skim from the skimmers. It's his way.
Sounds like you're saying he's going to jew the tribe. Didn't work out too well for Madeoff. Though I would love, and Rahm should be rotting in bang him in the ass Federal prison for life.
Be interesting to see if the people that had a hand in the court decision were influenced by........the folks that owned the swaps, or worse were the same people .........and had a vested interest in forcing a bankruptcy.
Be easy to verify.
I wonder what the outcome of the Class Action Lawsuits against the Big 7 TBTF Banks is?
- Foreign Conversion Fees
- High Interest Rates
- Compounding Interest Rate math problems
- False Pretenses, Non-disclosure of Credit Terms
- Unclear Billing, Problems, Hidden Costs
You never hear about the Results of Class Action Lawsuits against big banks.
I think Elizabeth Warrant Raised a Stink about Disclosure of terms and Billing in passage of her bill for Consumer Credit, but that just proves that Class Action lawsuits don't work/haven't worked.
2010 story from Ellen Brown:
"The problem was nailed in a class action lawsuit recently filed in Kentucky, titled Foster v. MERS, GMAC, et al. (USDC, Western District of Kentucky). The suit claims that MERS and the banks violated the Racketeer Influenced and Corrupt Organizations Act, a law originally passed to pursue organized crime. Bloomberg quotes Heather Boone McKeever, a Lexington, Ky.-based lawyer for the homeowners, who said in a phone interview, “RICO comes in because the fraud didn’t just happen piecemeal. This is organized crime by people in suits, but it is still organized crime. They created a very thorough plan.”
http://www.scribd.com/doc/38654717/Class-Action-vs-Mortgage-Electronic-R...
Well probably most class actions are tossed out of court...
Those jackasses wrote a right to take other people's money into their constitution. Let it burn to the ground.
"SECTION 5. PENSION AND RETIREMENT RIGHTS
Membership in any pension or retirement system of the State, any unit of local government or school district, or any agency or instrumentality thereof, shall be an enforceable contractual relationship, the benefits of which shall not be diminished or impaired. (Source: Illinois Constitution.)"
http://www.ilga.gov/commission/lrb/con13.htm
Also this interesting snippet:
“If we are going to get to the point in the state of Illinois where we can’t pay the pensions, we’re down the drain anyway; and anything you put in this constitution is not going to change that one bit,” Parkhurst said in 1970.
http://illinoistimes.com/article-11300-the-manufactured-crisis-over-illi...
And this:
LENGTHY PROCESS
But it can't be done quickly. The Illinois Constitution requires a six-month waiting period before a proposed amendment can be placed on the ballot, so November 2016 is the soonest it could be put up for a vote. Meanwhile, the statewide pension law changes have been stayed, keeping benefits and contributions and inflation adjustments all in place
http://www.chicagobusiness.com/article/20140716/NEWS02/140719888/amendin...
Snipes: We're safe around here.
Connery: You call this safe?
Snipes: Rough neighborhoods may be America's last advantage.
Rising Sun (1993)
I highly recommend that all the unemployable african american youth convert to judaism and demand immediate extraction to Israel. Knock out two birds with one stone, aye?
"complicating Mayor Rahm Emanuel’s efforts"
Riiiiiight!
Rahms backers are relying Rahm to bankrupt Chicago, they literally bet on it.
The flipside of swaps is oodles of cash, and pretty sure no1099s are issued for those swap payouts.