Friday, January 20, 2012 at 11:01 AM
The Southern Legislative Conference has released its latest Regional Resource - Municipal Bonds: Trends in 2011. The Resource examines how the municipal bond market fared in 2011, if fears expressed by certain experts regarding widespread bond defaults were realized, if investors shed their holdings in municipal bonds and fled to other asset categories and a number of related topics.
Background: Shock Waves Ripple Through Municipal Bond Market
In December 2010, shock waves rippled through state financial circles. Financial analyst, Meredith Whitney, who drew unprecedented attention after her prescient report on the dire financial position of Citibank and other bank stocks (a year before the 2008 global financial meltdown), appeared on the acclaimed CBS news program 60 Minutes to predict that as many as 100 American cities would default on their municipal bonds within a year.
Whitney stated “[T]here is not a doubt in my mind that you will see a spate of municipal bond defaults. Fifty to 100 sizable defaults, more. This will amount to hundreds of billions of dollars in the next 12 months.” The spate of defaults would force “the U.S. government to bail out the struggling states” with these cash-strapped cities, opined Whitney. Governor Chris Christie, New Jersey, appearing on the same program that day also expressed grave concerns about the dismal outlook for state finances in 2011 and stated, “[T]he day of reckoning has arrived, that’s it. And it’s going to arrive everywhere.”
Municipal Bond Issues Crucial to State and Local Government Finances
Given that thousands of state and local governments use the funds from their bond issues to “build, repair and improve schools, streets, hospitals, airports and many other public works,” Whitney’s predictions sent tremors throughout the already weakened fiscal foundation of the United States and destabilized the fragile state economic recovery in progress. State and local governments were still reeling from the deleterious effects of the Great Recession, the worst economic downturn to impact the U.S. economy in some eight decades. Municipal bond issuances, as a financing mechanism, remain an absolutely critical component of state and local government finances; the diverse operations of state and local governments would screech to a standstill if not for the liquidity afforded by the funds flowing from these issues. Hence, many public and private officials were justifiably alarmed about the potential seismic shift in the financing operations of state and local governments as a result of the widespread municipal bond defaults predicted by Ms. Whitney.