Tags: Cities | shunning | debt | bond

Cities Shunning Their Debt Pose Big Threat to Muni Market

By    |   Friday, 27 Jul 2012 07:37 AM

Some U.S. cities are treating their excessive debt just like some homeowners have treated their excessive mortgages – the cities are walking away.

And that strategy could mean trouble for the municipal bond market, The Wall Street Journal reported.

Typically cities have defaulted on their debt only as a last resort. But in the last month, four California cities have filed for bankruptcy or indicated they may do so — Stockton, Mammoth Lakes, Compton, and San Bernardino.

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This trend raises the issue of whether "distressed municipalities will begin to view debt service as a discretionary item in their budget and whether defaults will increase," Moody’s Investors Service said, according to The Journal.

If bankruptcy filings do increase, Moody’s may lower its ratings on munis, Anne Van Praagh, chief credit officer for public-sector ratings at Moody's, told The Journal.

"As the stigma around bankruptcy erodes, we are revisiting our long-held assumptions about the willingness of some cities to repay debt,'' she said.

In addition to California, Moody’s said cities in Washington, Pennsylvania and Missouri are at risk.

To be sure, government finances at the state level are more solid, experts said.

“Both sides of the balance sheet — spending and revenue — are better,” Peter Hayes, head of municipal bonds at BlackRock, told Bloomberg.

“Coming out of past recessions, states were quick to pick up spending, but they’re being more cautious this time with a high degree of fiscal austerity.”

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