Tags: California | Default | Risk | Iceland | Iraq

California Bigger Default Risk Than Iceland or Iraq

Friday, 14 May 2010 12:37 PM

California has now made the Top 10 list for governments with the highest probability of default — and the Golden State’s 20 percent default probability makes it a worse credit risk than Iceland and Iraq.

For California muni bondholders, this number bears watching. However, many analysts say comparisons between default risks in California and other countries aren’t valid.

"It's wacky," municipal debt analyst Jeffrey Cleveland at Payden & Rygel told Reuters.

"Just look at the ratio of debt to state gross domestic product. It's 10 percent for California and somewhere between 104 percent and 150 percent for Greece."

California's economy, at $1.845 trillion, dwarfs Greece's and on a standalone basis and would be the world's eighth-largest. It is the biggest borrower in the U.S. municipal market, which states and local governments use to fund roads, sewers and other infrastructure, The Business Insider reports.

Munis, whose total returns have smartly outperformed U.S. Treasuries in the last half year, have also become increasingly attractive to foreign institutional investors since 2009's roll-out of Build America Bonds and their fatter taxable yields.

And, unless Congress acts to keep the Bush tax cut on dividend income in place, dividend stock investors looking for a tax break may flood the muni market as well next year.

“If Congress allows the 15 percent dividends tax expire, upper bracket taxpayers could see taxes on their dividend income go as high as 39.6 percent,” Robert J. DiQuollo, CFP, CPA, President of Brinton Eaton Wealth Advisors tells Newsmax.

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California has now made the Top 10 list for governments with the highest probability of default and the Golden State s 20 percent default probability makes it a worse credit risk than Iceland and Iraq. For California muni bondholders, this number bears watching. However,...
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