The Wall Street Journal has an interesting graph showing the divergent yield paths of debt issued by the states of Illinois and Pennsylvania (I’d reproduce it here but for fear of IP infringement).
The entire $2.8 trillion municipal bond market has been in decline for the last month and a half. As investors have grown increasingly skeptical of governments’ abilities to pay back their debts, they have been demanding higher yields (or, to think of it another way, they are only willing to buy bonds if they are priced at lower levels).
But as the Journal reports, investors seem to be increasingly differentiating between those states that are in bad fiscal shape and those that are in really bad fiscal shape.
Consider, for example, Pennsylvania. Thought to be in middling fiscal condition, that state pays 0.2 percentage points above what the broader market pays when it borrows. But compare this with Illinois. That famously fiscally-irresponsible state must now pay 1.9 percentage points more than what the broader market pays (a year ago, they paid less than 1 percentage point above the market). Of course, this is exactly the sort of dynamic that has done-in so many other governments: irresponsible spending makes lenders charge higher yields, adding to the cost of borrowing and further bloating the budget.
According to Northwestern University Professor Josh Rauh, Illinois’s pension system will be among one of the first to run dry.
This helps explain why, last June, Illinois’s debt surpassed that of California to become the most expensive in the nation to insure. It is now more expensive to insure Illinois’s debt than it is to insure Iraq’s debt!
At an event last week, AEI’s Michael Greve quipped:
Illinois is not a failing state. Iraq is a failing state; Illinois is a failed state.