Tags: Municipal | Finances | bankruptcy | cities

Experts: Municipal Finances Face Rocky Road Ahead

Friday, 13 July 2012 09:16 AM

Municipal finances are coming under increasing strain, as evidenced by bankruptcies declared by the California cities of Stockton, San Bernardino, and Mammoth Lakes.

Expect more turbulence, but maybe not at the level that star Wall Street analyst Meredith Whitney predicted in late 2010, but close to it, experts say.

"There is risk and there are likely to be more bankruptcies and defaults," says Peter Coffin, president of Breckenridge Capital, a Boston-based firm that manages $13 billion in assets and has a dozen analysts devoted solely to the municipal space, CNBC reports.

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"I don't think it's systemic, but it's a greater risk than most municipal investors have been accustomed to in their lifetimes."

In December 2010, Whitney, who accurately called the real estate bust and its effects on the banking sector, predicted municipal defaults could run up into the hundreds of billions of dollars.

That hasn't happened yet, though Whitney maintains local governments remain in trouble even if not technically in default.

Though 28 municipal defaults took place in 2011 and about two dozen this year, many of which were small, Whitney told CNBC last March that a "tidal wave" of defaults looms.

Don't rule it out.

"Ultimately, her numbers...are not out of the realm of possibility over the long term," Coffin says.

The municipal bond market, meanwhile, appears to be stable, according to data.

The Barclays Municipal Index rose 3.66 percent through the first half of the year, while municipal bond funds saw $317 million in inflows for the most recent reporting week, according to Lipper data.

"In terms of the latest news with the city of San Bernardino, there's really been no impact in the market," says Susan Courtney, municipal desk analyst and lead portfolio manager for Prudential Fixed Income's municipal bond fund, CNBC adds.

"That's largely due to the fact that technicals are really strong in terms of the amount of investment money coming in, and San Bernardino is a relatively small issuer in the overall market."

Other investors say they're taking the San Bernardino bankruptcy in stride, as municipalities are overall safe investments.

"There’s still strong demand because there are more compelling reasons to jump into municipal bonds," says James Barnes, senior fixed-income manager at National Penn Investors Trust Co., MarketWatch reports.

"We’re going to have bankruptcies here and there,” Barnes says, but adds that unless bankruptcies really grow in number or a large one hits the sector from out of the blue, "the market is absorbing the news pretty well."

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