Defaults on municipal bonds could hit $100 billion within the next five years, according to the RGE consulting firm headed by New York University economist Nouriel Roubini.
Defaults will not take place on a system-wide scale and nor will they "infect the financial system," and will largely be isolated in nature, according to the report obtained by The Wall Street Journal.
Nevertheless, assuming a low default rate in the municipal bond market would be "Pollyanna-ish," as putting finances in order at the local level is a tough task to carry out.
"Avoiding a crisis will involve real austerity that has only partially been implemented thus far," says the report.
Roubini, who called the financial crisis well before it happened and also known for his arguably gloomy forecasts, isn't predicting defaults at the intensity star analyst Meredith Whitney did on "60 Minutes" in late 2010, when she said municipal defaults could soar to hundreds of billions of dollars.
Others agree that such pessimism isn't needed.
The risk of a major round of defaults is "close to zero," says Mark Zandi, chief economist for Moody’s Analytics, according to Bloomberg.
"I think that the very loud hand-wringing over the prospects for major municipal-bond defaults is entirely misplaced," Zandi says.
Furthermore, Zandi says, overall economic growth is going to pick up and the nation will add 1.25 million private-industry jobs over the next year.
Unemployment rates will fall by a percentage point to around 8% by the end of 2012.
"Most industries are rolling in cash," Zandi says.
"It’s really, in my mind, no longer a question of, 'Can businesses invest and hire more aggressively?' It's really a question of their willingness, and that’s a very important distinction."
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