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Mounting State Debt Could Fuel Next Economic Crisis

Monday, 06 Dec 2010 01:18 PM

State and local debts mounting into the trillions of dollars could fuel America's next economic crisis and one similar to the one plaguing Europe today, experts warn.

While municipal bankruptcies are rare, budget shortfalls nationwide could hinder the pace of the overall economic recovery as they expand in both size and number, straining local economies despite overall improvement.

"It seems to me that crying wolf is probably a good thing to do at this point," Felix Rohatyn, the former New York City mayor who saved the city from bankruptcy in the 1970s, tells the New York Times.

Furthermore, larger towns in important economies such as California and Illinois are at risk, prompting analysts to worry that investors could hold off on lending to weaker states and spark a crisis that could spread to the stronger states, similar to events unfolding in Europe.

"I don’t like to play the scared rabbit, but I just don’t see where the end of this is," says Rohatyn.

Municipal-bond issuers could face more payment delays and failures in 2011 once federal stimulus money dries up, Richard Lehmann, publisher of Distressed Debt Securities Newsletter, tells Bloomberg.
"Next year may well be the crunch year," Lehmann says.
"You may see a new wave of defaults."

Ratings agencies agree.

States and municipalities are dealing with financial stress at "a level that has not been seen for decades," according to the Fitch ratings agency.

High debt obligations and low revenue could prompt defaults to "increase from exceedingly low historical levels," according to Fitch.

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State and local debts mounting into the trillions of dollars could fuel America's next economic crisis and one similar to the one plaguing Europe today, experts warn. While municipal bankruptcies are rare, budget shortfalls nationwide could hinder the pace of the overall...
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2010-18-06
Monday, 06 Dec 2010 01:18 PM
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