The debate over muni finances promises to be an exciting one in 2011, with Meredith Whitney leading the doomers.
To be fair, lots of folks have been predicting trouble, and Whitney herself has been on this case for awhile, but since 60 Minutes this weekend, she's now the public face of the bear side, which is great for her.
Potentially she stands to be the hero of two consecutive crises, which would be remarkable from a career perspective.
Over at Bloomberg, Joe Mysak builds a counter-case. Here's one interesting point:
Why would a governmental entity choose to default on its bonds, especially if they make up a relatively small proportion of its costs?
“Debt levels for U.S. local and state governments are relatively low, with annual debt service representing a relatively small part of budgets,” Fitch Ratings said in a special report in November.
Entitled “U.S. State and Local Government Bond Credit Quality: More Sparks Than Fire,” the report said, “The tax- supported debt of an average state is equal to just 3 percent - 4 percent of personal income, and local debt roughly 3 percent - 5 percent of property value. Debt service is generally less than 10 percent of a state or local government’s budget, and in many cases much less.”
The lead analyst on the report was Richard Raphael, who has been covering municipal finance for 31 years. He is not one of the analysts “who got everything wrong in the housing collapse,” in the words of correspondent Kroft. In his report, Raphael said, “debt service is a relatively small part of most budgets, so not paying it does not do much to solve fiscal problems (particularly as compared to the costs of such an action).”
Click here for 16 cities that will be forced to make huge cuts to stave off bankruptcy >
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