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Municipal Bankruptcies the New Norm

140 views  2012-10-16 22:49
“Local governments have to control their budget deficit, and deficit cuts are much needed by municipalities in order to avoid any future disturbance with creditors,” claims Lombardi. According to the editor, the after-effects of local governments taking the usual steps to stay alive will hit the municipal bond investors—a $3.7-trillion market.

In the article “Beware Municipal Bond Buyers; This Situation Isn’t Getting Any Better,” Lombardi reports that cities in California, like Vallejo, Mammoth Lakes, Stockton, and San Bernardino, have already defaulted on their municipal bonds, and he believes that Compton is most likely to be the next to default.

“What do all these towns have in common? They are suffocating under big budget deficits,” says Lombardi.

Lombardi notes that the cities that have already defaulted on their municipal bonds are still scrambling. Stockton, California, he notes, wants its municipal bond insurers to take a bigger hit because it has pensions to pay—$26.0 million each year.

“The insurer of the municipal bonds stands to lose more than $100 million,” says Lombardi.

In sum, the number of municipal bankruptcies is going to increase and the municipal bond investor will certainly be affected by it, concludes Lombardi.

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