To the extent that investors have been worried about anything this year, it’s that Meredith Whitney’s prediction of a municipal finance collapse will become more than just a 60 Minutes scare story. (See: Muni Bonds the Next New Crisis)
By Henry Blodget at TechTicker
Specifically, the holders of municipal bonds–and employees in city and state governments who have been promised generous benefits and pensions–are worried that mounting budget problems will get so bad that municipalities will have to default.
If cities and states default, they will restructure their debts and pension obligations, which will mean a haircut for bondholders and public-sector employees alike. And for obvious reasons, bondholders and public-sector employees don’t want that to happen.
So far, Washington has basically ignored this potential crisis. But now, the New York Times reports, Congress has quietly begun discussing how states might be allowed to go bankrupt and restructure their obligations. And not surprisingly that is bringing howls of protest from those who work in the public sector.
Could a muni-finance crisis once again bring the economy to its knees? Portfolio manager Barbara Marcin of Gabelli doesn’t think so.
Most debt problems, she points out, are worked out without major disruptions to the system. Obligations are restructured, bondholders and other constituencies take a haircut, and then life goes on. And the same will likely be true in this case.
See Also: 12 Reasons Why Meredith Whitney Is Wrong About A Coming Municipal Crisis
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