Harrisburg defaults

By Felix Salmon
September 1, 2010
slideshow listing "20 Recession-Proof Cities": the ones with high pay and sustained economic growth. I'm not entirely clear on how to link to any given city on the list, but if you click through you'll find Harrisburg, Pennsylvania at #7, the very picture of a hale urban center.

Which is now defaulting on its municipal debt. It's the largest municipal default of the year, after Jefferson County in Alabama, and it surely presages more to come.

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The Daily Beast kicked off this week’s offerings with a slideshow listing “20 Recession-Proof Cities”: the ones with high pay and sustained economic growth. I’m not entirely clear on how to link to any given city on the list, but if you click through you’ll find Harrisburg, Pennsylvania at #7, the very picture of a hale urban center.

Which is now defaulting on its municipal debt. It’s the largest municipal default of the year, after Jefferson County in Alabama, and it surely presages more to come.

It also shows the moral hazard of bond insurance:

A missed payment is “a bad signal,” said Alan Schankel, managing director at Janney Montgomery Scott in Philadelphia, adding that it raises the concern that some distressed issuers may be more likely to skip bond payments guaranteed by insurance companies.

It’s worth noting that Jefferson County, too, had its bonds wrapped by an insurer.

No one explains this better than Warren Buffett, who laid it all out in 2009: the people running municipalities are far more likely to default if they end up harming only insurers than they are to default directly on their bondholders — who are also likely to be their personal friends and colleagues.

Which might partially explain — along with an incinerator fiasco — why Harrisburg, which is doing quite well, economically speaking, has now contrived to default.

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