|
|
So I'm sitting
here trying to turn a pile of (mostly terrifying) data on muni bonds into a
post that explains why this is the next domino to fall, and here comes Time
Magazine with a feature on that subject:
Municipal
Bonds: The Next Financial Land Mine?
As Wall Street
nervously watches the sovereign debt crisis unfold in Greece, another
potential landmine is looming closer to home, one that could bring U.S.
cities and towns to their knees, force the federal government to cough up
another bailout package, and potentially send the unemployment rate much
higher. The danger this time? Municipal debt.
State and local
governments are frantically scrambling to meet budget shortfalls as high
unemployment and shaky consumer confidence mean less income tax and smaller
sales tax revenue for government coffers. At the same time, falling home
prices and rising foreclosures will start to hit municipalities hard this
year as all those property reassessments done over the past 18 months kick
in.
A couple of
municipalities, such as Los Angeles and Detroit, have even whispered the
"B" word. Former Los Angeles Mayor Richard Riordan argued in an
editorial in the Wall Street Journal earlier this month that the city will
likely have little choice but to declare bankruptcy between now and 2014.
Also, several smaller markets, such as Harrisburg, Pa., and Jefferson County,
Ala., have openly talked about filing for Chapter 9 bankruptcy -- a
reorganization available only to municipalities.
In general,
municipalities try to avoid Chapter 9 filings. Although such filings make it
easier for a city to break onerous labor contracts or make other politically
tough cost cuts, they can have hidden costs, such as distracting politicians,
alienating business and making it more difficult for a city to raise cash in
the capital markets going forward. The city of Vallejo, Calif., for example,
has been in Chapter 9 since spring 2008, and observers say the process has
been costly and hurt the city's ability to attract new business. "It's
been two years and the case is still going on and there's still significant
disputes with the unions," says Eric Schaffer, a partner at Reed Smith
LLP. "Ultimately you hope to bring everybody to the table and share the
pain, but that can be a messy process."
Bankruptcy is a
particularly unnerving prospect for bondholders. Municipal securities are a
$2.8 trillion market, according to Municipal Market Advisors. An avalanche of
investors sought refuge in the sector in recent years, lured by the stable,
tax-free nature of muni bonds. More than $69 billion flowed into long-term
municipal bond mutual funds in 2009, up from only $7.8 billion in 2008 and
$10.9 billion in 2007, according to the Investment Company Institute. Another
$15.2 billion has been added so far in 2010.
But increasingly
munis are seen as vulnerable to the same forces that have put companies and
some sovereign governments in crisis. "The whole system is pretty
fragile," says Brian Fraser, a partner at the law firm Richards Kibbe
& Orbe LLP. "The assumption has always been that municipalities
aren't going away and that they can always raise taxes to pay debt," but
that's no longer the case, he says. He noted how Jefferson County, which is
teetering on bankruptcy, was unable to raise sewer rates to meet its sewer
bond obligation. Adds Richard Raphael, executive managing director at Fitch
Ratings: "This is the worst downturn ... and most pressured environment
for municipals in decades." Read the rest of the article here
Some thoughts:
·
Note
the process at work: The housing bust caused home prices to fall, which over
time causes assessments to decline, which results in lower property taxes.
This is just now playing out, lowering tax revenues for cities that are
already unable to pay their bills.
·
Along
with U.S. Treasuries, munis are where capital hides during uncertain times.
This isn't speculative money; it's "cash" that risk-averse
investors assume will hold its value and be readily accessible. So most muni
owners aren't paying attention and will be doubly shocked when they not only
lose money but can't get at it because of default or bankruptcy.
·
This
is America's Greek crisis. A major city or state will default on its debts,
threatening a cascade failure of the many others in similar straits. The
federal government, like the EU, will stare into the abyss and will blink,
agreeing to take muni debt onto the federal balance sheet.
·
At
some point the global markets will notice that the U.S. is just California
writ large and will treat the dollar accordingly. Maybe munis are the wake-up
call.
John Rubino
DollarCollapse.com
John
Rubino is co-author, with GoldMoney’s James Turk, of The Collapse of
the Dollar and How to Profit From It (Doubleday, 2007), and author of Clean
Money: Picking Winners in the Green-Tech Boom (Wiley, 2008), How to Profit
from the Coming Real Estate Bust (Rodale, 2003) and Main Street, Not Wall
Street (Morrow, 1998). After earning a Finance MBA from New York University,
he spent the 1980s on Wall Street, as a Eurodollar trader, equity analyst and
junk bond analyst. During the 1990s he was a featured columnist with
TheStreet.com and a frequent contributor to Individual Investor, Online
Investor, and Consumers Digest, among many other publications. He now writes
for CFA Magazine and edits DollarCollapse.com and
GreenStockInvesting.com.
|
|
