Weighing the risk of investing in states

Sarah Gardner May 28, 2009
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Weighing the risk of investing in states

Sarah Gardner May 28, 2009
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TEXT OF STORY

Steve Chiotakis: It’s no secret that the state of California is in a financial crisis.
There are fears the state could default on its debts. So what does that mean for other places? Are investors interested given all the risk? Sarah Gardner says yes.


Sarah Gardner: So far, the Golden States’ problems haven’t tainted the borrowing ability of other states. And even a crippled California is still attracting investors. It does have the lowest credit rating of any state and pays a premium to borrow.

But it’s not as much as you’d think, say Marilyn Cohen, president of Envision Capital Management:

Marilyn Cohen: The truth of the matter is, it’s really only a little bit more interest, no matter how bad the headline news is.

Cohen says that’s partly because investors know California and other states will do what it takes to avoid defaulting on their debt, including raising taxes.

But Tom Petruno, who blogs about bonds for LATimes.com, expects investor attitudes towards public debt could sour long-term:

Tom Petruno: You get more headlines out there talking about problems that cities, counties or states are having, and bond investors think, hmm, maybe I better demand a little more yield here, because I’m not quite sure just how safe these really are.

And with states and cities paying more to borrow, that leaves less for schools, parks, roads and other public services.

I’m Sarah Gardner for Marketplace.

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