What would a debt-limit crisis cost the states?

July 27, 2011

Thanks to Jordan Eizenga at the Center for American Progress, you can see some scenarios of the impact of the halt in payments to states if the debt ceiling is not raised. Jordan says:

The key thing to remember is that these are cuts that would occur even if we protected Social Security, Medicare, Medicaid, defense, and UI. Failing to raise the debt limit causes unavoidable pain to states.

Roll your mouse over to see the effect on each state. More analysis here.

It’s on in Alabama

The crisis in Jefferson County, Alabama is quickly coming to a head. The County Commissioners’ willingness to file for Chapter 9 municipal bankruptcy is putting a lot of pressure on bondholders, led by JP Morgan, to agree to a settlement. It appears that the entire Alabama political structure is aligned to do the best for their citizens. Right now the epicenter of the struggle between the people and Wall Street is Birmingham, Alabama.

Excellent reporting on the story from The Birmingham News, Bloomberg, Global Economic Analysis and the Wall Street Journal. Stay tuned.

Do muni experts believe there is a panic coming?

I was a little surprised to read of a coming muniland panic in a piece on Smartmoney.com. The author claimed the following:

Along with those tangible effects, many experts believe a downgrade could ignite another panic and massive sell-off in the sector. As investors question the safety of muni bonds and the U.S. government’s ability to act as a backstop for weaker states, their prices could plummet, leading to big losses for investors, says Richard Ciccarone, managing director and chief research officer for McDonnell Investment Management.

The muniland boat will rock in rough seas; investors should pay attention and be alert to events. But predicting panic and “big losses” is a stretch.

California lowers its borrowing short term borrowing costs

It can’t be easy for California’s State Treasurer to juggle the cash needs of his heavily indebted state, but he seems to have made significant progress in lowering the borrowing cost for a $5.4 billion short-term “bridge loan” he arranged yesterday. AP reports (emphasis mine):

California received loans from eight banks and private investment firms. Goldman Sachs and Wells Fargo & Co. provided the largest amounts, at more than $1.4 billion each.

The state, which currently has the lowest credit rating among the 50 states at A-, plans to repay the loans later this summer through routine borrowing notes to be issued in late August.

Lockyer appeared to obtain a good interest rate based on the state changing the way it calculates how much money it has in reserve this year.

The treasurer’s office said the yield on the notes is 0.237 percent, compared with 1.4 percent the state paid for short-term borrowing in 2010. The latest notes mature on Nov. 22, but the state could pay them off ahead of time.

More from Bloomberg.

Twitter Talk

@coopnytimesNearly all states are spending less than they did in 2008, counting inflation, @CenterOnBudget finds: bit.ly/oB2fjy

@MillerTabak: when a economy weakens bonds prices should rise – when a economy weakens and bond prices fall it is a clear sign insolvency is a concern

@GreeneBarrett: Majority of govs talked about reorganization in 2011 State of State talks. But how do you make it work? http://ow.ly/5OjEL

@munilass: Toll road debt rated by Moody’s rose 19.2% in 2010. Relying on rate increases to service higher debt. Neg outlook for sector. (Bond Buyer)

Good Links

Pew ResearchThe Trillion Dollar Gap Grows Wider

ZeroHedgeMapping America’s Underfunded State Pension And Healthcare Liability Debacle

Wall Street JournalFed Finds 46 References to Credit Ratings in Its Rules

Reuters: S&P, Moody’s execs to testify before Congress

Bond Buyer: Market Post: Waiting for New Triple-A Deals

Bond Buyer: Muni Adviser Fee Eyed

Decatur Tribune: State Treasurer Dan Rutherford Explains Potential Impact of a Federal Debt Ceiling Impasse

Bond Buyer: Triple-A Columbus Fears Fallout

NJ.com: In face of lawsuit, Gov. Christie makes copy of calendar public, revealing private dinner with Fox News chief

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