Meredith Whitney: ‘Tidal Wave’ of Muni-Bond Defaults Still Coming


By Forrest Jones

A “tidal wave” of defaults in the municipal bond market is still building and will eventually hit the United States, says Wall Street analyst Meredith Whitney.

Many U.S. cities, towns and municipalities are insolvent but are treading along similar to how Greece did for years before officially defaulting.

In late 2010, Whitney told 60 Minutes that municipal defaults could run up into the hundreds of billions of dollars although that hasn’t happened. Maybe not officially, but insolvency is a deepening problem, and defaults are still on the way.
“You have Stockton (Calif.) that is on the brink of bankruptcy. You have five cities, including Detroit, which is on the brink of insolvency. It’s fascinating, because there’s been so much back-room political maneuvering to keep these cities from going bust,” Whitney tells CNBC, pointing out how California is trying to pass legislation to prevent municipalities from declaring bankruptcy.

“So there’s been every effort on the part of the states to prevent this tidal wave of defaults, which is going to happen sooner or later. It’s happening at an accelerating pace.”

Taxes are rising, social services are being cut and fiscal shortfalls will keep widening.

“They’re not called technical defaults. It took how long for Greece to become a technical default, so they’re insolvent, they’re not paying their bills,” says the founder of the Meredith Whitney Advisory Group.

“You’re either willing to see it or you’ll shut your eyes, and if people want to tell me, ‘Oh, I was wrong,’ because this hasn’t played out, stay tuned.”

Municipal defaults rose to 5.5 per year in 2010 and 2011, from 2.7 in the previous 39 years, Moody’s Investors Service says in a report.

Most defaults involved healthcare and things like multifamily housing projects, although more failures in the last two years came from smaller cities unable to pay services, pensions and salaries, Moody’s finds.

“While we expect the vast majority of municipal issuers to continue to pay their debts, we also expect a very small but growing number of general government issuers to default on their bonded debts,” says Anne Van Praagh, Moody’s chief credit officer for public finance, according to Bloomberg.

The municipal debt market returned 11.2 percent in 2011, its best performance since 2009, according to Bank of America Merrill Lynch index data, Bloomberg adds.

 

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