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Is a Municipal Debt Crisis Imminent?

by Eileen Norcross on September 30, 2010

in Public Finance

Veronique de Rugy has a great post at NRO about the potential for a muni debt crisis in the near term. The basic problem: state and local governments are facing a new budgetary reality. Benefits to public employees and Medicaid obligations are growing, while revenues are only starting to show signs of recovery. Is there a tradeoff imminent for governments between paying bondholders, pensioners, or for current services?

Meredith Whitney joined Warren Buffett among those warning of widespread defaults in the $2.8 trillion muni debt market necessitating a federal bailout. However other experts disagree, arguing that taxpayers, municipal workers, and service beneficiaries will feel the coming cuts to local and state governments, thus cushioning debt holders.

Much also depends on the extent to which state and local governments have an accurate picture of their true financial condition. The past few years have revealed sometimes an extreme disconnect between fiscal reality and official accounting, something I would argue the stimulus helped to augment.

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