Posted on Wednesday, January 19, 2011
As the financial struggles of cities and states become ever more worrisome to investors, the market in their debt has hit its lowest level since the financial crisis, the Wall Street Journal reports.
It's been a dismal few months for local governments. The market in their bonds fell every day this week, the WSJ reports, capping a nine-week stretch of net selling, an indication of investor pessimism. As investors get skittish, and as ratings agencies affix downgraded labels, cities and states will find it increasingly more difficult to resolve their financial woes.
In a sign of local governments' worsening plight, it became even more expensive for them to borrow money Thursday, as yields on 30-year high-rated debt rose to 5.01 percent, the first time that figure has broken five percent since the financial crisis.
Some experts believe a large-scale crisis in the roughly $3 trillion municipal bond market isn't possible, given the long-term nature of local government debt. But a growing group of veteran players says municipal budget strains could plunge the country into another financial crisis. JPMorgan CEO Jamie Dimon this week echoed analyst Meredith Whitney, investor Warren Buffett and others, as he said he expects more cities to declare bankruptcy.
"Be very, very careful," Dimon said, according to Bloomberg.
Many investors don't need telling. Whitney, perhaps the most prominent voice warning of a coming municipal crisis, refused to name the three cities she believed to be in the worst shape, when she appeared in CNBC on Wednesday. Naming names was simply too dangerous.
After deals with Wall Street firms helped many local governments juice their revenue in the years leading up to the crisis, and even in the years after, many of those deals are now having the opposite effect. In just one example, states and cities have had to pay over $4 billion to Wall Street firms since 2008 to exit $500 billion worth of complicated deals, known as interest rate swaps, that went sour, Bloomberg reported.
As other deals run their natural course, local governments will lose Wall Street support, the WSJ says. About $109 billion of debt guarantees are expiring this year, meaning many governments will be left with sizable portions of debt more at risk of going bad. The advantage of exiting Wall Street deals is that it means fewer fees, but a drawback is that it could leave governments more vulnerable.
Facing weak investor demand, a New Jersey agency slashed the size of a debt sale this week to $1.1 billion from $1.8 billion, by nearly 40 percent, according to the WSJ. In Texas, a strapped public agency struck a new deal with JPMorgan that requires it to pay back a 30-year bond over the next three and a half years.
The Huffington Post William Alden