Municipal bankruptcy brings risks

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webmaster | 04/20/13
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No one is seriously suggesting that California will soon become another Cyprus, the Greek-speaking Mediterranean island nation whose economic bailout plan includes dunning holders of “large” bank accounts as much as half their holdings and freezing the rest.

But since a federal bankruptcy judge gave the go-ahead for the city of Stockton to seek shelter from more than $1 billion in debts via Chapter 9 bankruptcy, alarm bells have been ringing loudly in the heads of municipal bond investors.

They’ve already seen California cities and counties file four of the five largest municipal bankruptcies in U.S. history, beginning with the $4 billion 1994 Orange County debacle, and then Vallejo’s $175 million case in 2008 and the in-progress cases of Stockton and San Bernardino.

If you’re the chief of municipal bond investing for a big bank, whether on Wall Street or in San Francisco, Los Angeles or Chicago, this gets your attention. You might hesitate to lend hundreds of millions of dollars to other cities and counties if you fear they might go the Stockton route. Even if you proceed, you might insist on higher interest rates to compensate for what now appears to be added risk. That can translate to higher local taxes...

 

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