Thursday, November 5, 2009

"The Approaching Muni Bond Implosion" and "Allstate Sells Municipals as Governments Run Deficits "

First up, The Economic Populist:

New York Lieutenant Governor Richard Ravitch made a statement last week that should have gotten headlines, but didn't.

“I believe that the states across the United States will face deficits a year after stimulus ends of $300 billion to $500 billion a year,” Ravitch told about 200 people gathered at New York University’s Robert F. Wagner Graduate School of Public Service. “You’re going to begin to see cracks in the municipal bond market well before then, because that’s an inexorable casualty of unfundable state deficits.”

To put this into perspective, the total state budgets for 2010 was about $1.4 Trillion. If his predictions are anywhere close to being true then the budget problems of the states are essentially unfixable.

“These are numbers that are unprecedented,” Ravitch said, adding that the current recession is unlike any in the nation’s history, with unemployment continuing to rise, “banks are falling like autumn leaves, and nobody is projecting any significant growth in 2010.”

The condition of state and local budgets are in their worst shape since the Great Depression, and if the economy doesn't turn around quicker than the mainstream believes, we are going to see defaults that will shake the economy to its foundation.
Only four months into the 2010 fiscal year, 26 states already have deficit problems totaling $16 Billion. This is after the states had to close $178 Billion of budget gaps this past summer. Only 22 states had budgets deficits of less than 20% of their total budgets. At least 9 states are projected deficits for 2011 of at least 20%, and those are often optimistic projections.
All the easy cuts have been made. Any new cuts will mean sawing into bone.

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The states have mostly closed the budget gaps through borrowing, and for now the market has responded well with strong demand. However, lately the sheer volume of supply in the three trillion dollar market is starting to drive up yields....MORE

And from Bloomberg:
Allstate Corp., the largest publicly traded U.S. home and auto insurer, is paring its municipal-bond holdings because state and local governments are “not in great shape,” Chief Executive Officer Thomas Wilson said.

“We’ve just recently begun to reduce our exposure to municipals because we are uncomfortable with some of the fiscal practices of some of the government entities,” Wilson said yesterday in an interview after the Northbrook, Illinois-based company reported a third-quarter profit. “If you look at their balance sheets or income statements and put it in financial terms, they are not in great shape.”

Allstate cut its municipal holdings 8.3 percent to $22.1 billion in the third quarter as tax-exempt yields plunged to a 42-year low and governments struggled to maintain budgets amid the recession. State tax collections declined by 16.6 percent in the three months through June from the year-earlier period, the largest quarterly decline since at least 1963, the Nelson A. Rockefeller Institute of Government said in a report last month.

Officials “haven’t adjusted their spending, so they are running deficits,” Wilson said. “When we look at the risk- return profile we don’t think we are being paid enough to take that risk today.”

Within its municipal portfolio, Allstate is reducing holdings of health-care debt and zero-coupon bonds, Chief Investment Officer Judith Greffin said today in a conference call with analysts and investors. Zero-coupon bonds mature in more than one year and don’t pay interest.

Interest Rate Risk

“Given our view on reducing our exposure to interest rate risk, that’s part of the reason why we wanted to reduce our exposure to zero-coupon bonds,” Greffin said....MORE