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How bad will the municipal bond market get?

A bond trader observes offers prices in the U.S. Treasury 10-year T-note options pit at the Chicago Board of Trade in Chicago, Ill. Bond prices where up slightly during mid-day trading.

TEXT OF STORY

Kai Ryssdal: We're going to take a minute here and tap into the economic zeitgeist. Not the holiday retail sales thing everybody else is doing, or the tax deal thing in Washington, or worries about the deficit.

There's been some buzz the past couple of days about a corner of the bond market that might be bringing trouble. Munis -- municipal bonds that local governments use to get their working capital.

From New York, Marketplace's Janet Babin has more.


Janet Babin: Star analyst Meredith Whitney made her latest prediction on CBS's "60 Minutes." She expects "hundreds of billions" of dollars of municipal bond defaults next year.

Meredith Whitney on "60 Minutes": Next to housing, this is the single most important issue in the U.S., and certainly the largest threat to the U.S. economy.

To put Whitney's prediction into perspective, the one-year record for municipal bond defaults was just over $8 billion, set in the tumult that was 2008.

Bloomberg columnist Joe Mysak calls Whitney's comments "reckless."

Joe Mysak: To say all of the sudden that hundreds of billions of dollars of municipal bonds will default, the number is in the realm of the fabulous.

Not that Mysak is Mr. Brightside -- he says there very well may be municipal defaults totaling $5 to $10 billion next year. But he expects the trouble to surface in bonds that fund nursing homes or non-profits. Those organizations often partner with local governments on bonds, so they qualify for tax-free financing.

Really, the the last thing cities and towns want to do is default. It makes it even harder to borrow money and get out of financial trouble. Plus, Richard Ciccarone at McDonnell Investment Management says there's evidence that some economies are stabilizing.

Richard Ciccarone: One economic source that we rely on looks for a 4 percent GDP growth rate next year.

The more growth, the higher the potential tax rolls, the more remote the chance of default. Still, parts of New Jersey, California, Arizona, and elsewhere have more bills outstanding than cash in hand. Analyst Steve Murphy at Standard & Poors lays out the options:
raise taxes, and cut services.

Steve Murphy: There are very difficult decisions that have to be made, so they will wait until the last minute, but history has shown us, that they will make the choices they have to.

That might not sit well, though, with the residents of these broke cities and towns, who have to live with these choices.

In New York, I'm Janet Babin for Marketplace.

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I'd like to hear a little more about Ms. Whitney's prediction. What is the basis for her conclusion? Why only report on the counterpoint to this claim? Marketplace, you're leaving me in limbo on this one.

RICHARD CICCARONE: One economic source that we rely on looks for a 4 percent GDP growth rate next year.

How about we talk AFTER we've found that 4% GDP growth?

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