$2 trillion municipal bond debt crisis could bring down 100 US cities, analyst warns

Raw Story

A new disaster is looming, according to a prominent market research analyst.

Meredith Whitney, a financial analyst who runs her own consulting firm and correctly predicted the major debt fallout of Citigroup, warned in a little-reported on interview Sunday that as many as 100 US cities face default on their municipal bonds.

Cities and states issue bonds to pay for public services. The trouble is that municipalities are no longer collecting enough in taxes to meet their budgetary needs. According to a 60 Minutes report Sunday — which received almost no attention by the popular press — US cities have spent nearly half a trillion more than they’ve collected in taxes, and face pension shortfalls of $1 trillion. Video of the CBS piece follows this article.

“Next to housing this is the single most important issue in the US and certainly the biggest threat to the US economy,” Whitney told a CBS 60 Minutes’ interviewer Sunday night.

“There’s not a doubt on my mind that you will see a spate of municipal bond defaults. You can see fifty to a hundred sizeable defaults – more,” Whitney added. “This will amount to hundreds of billions of dollars’ worth of defaults.”

Whitney became a household name in the investment community after issuing a dire report on Citigroup in 2007, prior to the global credit crisis. She predicted the bank would face a whopping credit crunch — which it did — and cut its dividend — which it also did. The bank was subsequently forced to accept a massive government bailout.

Citigroup holds the most municipal bond debt out of all the banks in the US.

“Detroit is cutting police, lighting, road repairs and cleaning services affecting as much as 20% of the population,” the Guardian’s Elena Moya noted late Monday, writing about the 60 Minutes piece. “The city, which has been on the skids for almost two decades with the decline of the US auto industry, does not generate enough wealth to maintain services for its 900,000 inhabitants.”

“The nearby state of Illinois has spent twice as much money as it has collected and is about six months behind on creditor payments,” Moya added. “The University of Illinois alone is owed $400m, the CBS program said. The state has a 21% chances of default, more than any other, according to CMA Datavision, a derivatives information provider.

She continued: “California has raised state university tuition fees by 32%. Arizona has sold its state capitol and supreme court buildings to investors, and leases them back.”