Some Muni Bond Headlines
Just posting some links to interesting articles on muni bonds that I've run across over the past week or so. Primarily as a placemarker for myself, but feel free to add links or your thoughts on munis.
This is way outside my swim lane, but I do think munis are near the top of the list for 'next big crisis.' Some conflicting opinions and stories here. My comments in italics.
House GOP leader says no federal bailout of states – Congressman Eric Cantor (R-VA), the House Majority Leader, adds his voice to those opposed to a bailout for states in financial trouble. Good summary article.
California treasurer warns of IOUs, if no cuts – San Diego 6 carries this AP piece stating that, according to State Treasurer Bill Lockyer, California could have to pay bills with IOUs as early as April if lawmakers don’t cut spending. Note this wouldn't be a bond default. In California, state debt service is second only to education in the pecking order for claims on revenue.
A Path Is Sought for States to Escape Debt Burdens – This NY Times piece from last week reports on efforts to add provisions for a state to declare bankruptcy to Federal law. This would open a number of legal worm cans regarding state sovereignty, authority of the state executive and legislature, etc., especially for states with provisions for who has first claims to revenue in their constitutions, e.g. which has precedence, the state constitution/code or Federal bankruptcy law?
Muni Bonds: Default Fears May Be Overblown – Businessweek presents both sides of muni default risks.
Warning From S&P on Munis – WSJ, headline pretty much says it all.
The Future of Munis – CNBC interview with Suzanne Shank, CEO of muni bond investment firm Sibert Brandford Shank. Suzanne disagrees with Meredith Whitney’s widely reported muni bond default projections.
Summary - A lot of those saying there is no real risk of wholesale defaults point to provisions, like California's, that put bond holders at or near the top of revenue claims. I haven't seen any discussion of how difficult it might be for that to change. Politically, I image there would be close to rioting in the streets if states were cutting essential services and/or passing big raises to fees and taxes in order to fund payments to bondholders. We saw some of that in Ireland when public pension funds were pledged as part of the bailout for bank creditors.
I do think some of the mass doom and gloom predictions are way overstated, but I also think there is a very real risk of a big state or significant sized municipality to default or go through some kind of restructuring on its bonds.
There are probably some very good deals in the muni market right now. Money flows out of ETFs and other funds have likely marked down prices across the board and I suspect someone who knows what they're doing can pick up some great bargains. I don't fall in the 'someone who knows what they're doing' category.