These are dangerous assumptions. Just as with mortgages, the very fact that investors place unlimited faith in a market could eventually destroy that market. If investors believe that they take no risk, they will lend states and cities far too much—so much that these borrowers won’t be able to repay their obligations while maintaining a reasonable level of public services. The investors, then, could help bankrupt state and local governments—and take massive losses in the process. To avoid that scenario, investors must take a long, hard look at what they’re doing. Where state and local finances are untenable, they should stop throwing good money after bad.
You might think that municipal bonds would have lost their low-risk reputation. In the past two tumultuous years, tax revenues have plummeted by double-digit percentages, and state and local governments have struggled to close historic deficits. Nationwide, they face cash operating gaps of $200 billion, or 15 percent of their budgets, through 2011. Big spenders have shown no sign of cutting costs in line with a new reality. Ordinarily, if a borrower is in such straits, lenders start thinking twice about lending it yet more money: Who’s to say that the borrower won’t declare bankruptcy and default on its obligations?
Yet the industry’s gatekeepers still consider municipal bonds low-risk. “We do not expect that states will default on general-obligation debt, even under the most stressed economic conditions,” analysts at Moody’s, one of the three major credit ratings agencies, wrote in a February 2010 report. As for cities and towns, “we expect very few defaults in this sector given the tools that local governments have at their disposal.” The firm’s chief competitor, Standard and Poor’s, agrees.
Things never fail until they do.
0 comments:
Post a Comment