Economic Collapse

[basserdan]

Municipal Market Teetering On The Edge

by Karl Denninger
Posted 2013-06-19 12:50

Remember folks, all crashes initiate in the credit markets.

Now HYG (high-yield corporate credit) has bounced somewhat the last few days. But municipals have not.

Chief among the reason for the "not" is that Detroit has declared that "GO" (general obligation) bonds will be treated as unsecured debt.

May I have a "Duh!" to go with that?

GO bonds have been considered "safe" because they are backed by the "full taxing authority" of whoever issues them. Nobody bothers to ask "what happens when that taxing authority is not matched by the residents ability and willingness to pay?"

See, people can leave. They can move somewhere else, specifically, at which point their tax revenue walks with them. If you squeeze people too hard they will leave.

So the premise that GO bonds have an "unlimited" guarantee is in fact false. No such "guarantee" in fact exists.

The 900lb Gorilla in the room is that virtually no government entity actually pays off debt these days for a given project or function. They just roll it over again and again, relying evermore on the "unlimited" faith and credit they claim is available to them.

If you've been believing that line of crap you may have just gotten a wake-up call.

This particular one is small, in that Detroit's actual obligations are, in scale, not all that large.

But the precedent is clear, and if you look at municipal and state finance generally you see the same patterns throughout the nation -- selling off assets to fund current liabilities, rolling debt and compounding it for depreciating assets.

Oops.

http://market-ticker.org/akcs-www?post=221955