That's a theory. Let's look at it from real-life angle - who will set it up this way? Can you imagine Cal or Il poltician, talking to public, describing there is no way to fund pensions to teachers/policemen/firefighters/etc., hence starting tomorrow/next week/Jan 1st next year the state just stops paying it (or decimates the payments) , while the prices for bread and milk around rising every month. I bet there is nobody able to come with something like this, just literally nobody. So, if (and when) there is nobody, this won't happen. And when the state funds are drying up and no more banks are ready to lend(in any form), and the state(s) is on brink of collapse, what's next? Let's assume - knowing last years history about 'too big to fail' . Isn't Cal state to-big-to-fail, bigger then GM or Chrysler? Of course, it is! Isn't media able to promote terrific scenarios of non-functioning police/state education/med services ? Of course it is! So, FED - 'last time' again, after making very angry faces, will 'buy' a few trillions of munis, partually openly, partually via their buddies who owe them a favor, and the party is on again.. And all big shots will talk from flat panels in every house, that it was bad thing to do, but the only an option, and a politician, who is in the charge that moment, will be re-elected by happy unions, etc... And this way US will be running and running until what? No idea what. It will stop in very bad way, 'cause rewarding bankrupts is demoralizing the productive members of society, but when and how it will end up - I have no idea.
For starters, states like New York run up "their" debt indirectly. They issue bonds through tens of thousands of separate legal entities. New York "state" doesn't owe all of that $78.4 billion in debt -- it owes only $3.5 billion in "general-obligation" debt. Who owes the rest? The MTA, the Dormitory Authority, the Triborough Bridge & Tunnel Authority and so on. Legally, each is not a government but a "public-benefit corporation." Each has its own board, its own rules and its own contractual agreements with creditors, from bondholders to unions. Each of those agreements offers creditors different protections. The Transitional Finance Authority, for example, gets funds to pay off its bonds from New York City taxes that are collected by the state, which pays the TFA its share before sending any cash to the city. Other "state" bondholders depend on things like car tolls to pay off their debt. If this money comes up short, the state in some cases promises to make up the difference; in other cases, bondholders already know that they will take the hit, through decades-old precedents that don't need new federal interference. So, if we let New York go "bankrupt," does that mean that the TFA should go bankrupt? How 'bout the MTA? Should they all go bankrupt? Should a judge be able to take a big pile of money that the MTA, as a corporation working on behalf of the state, has committed to transit retirees and give it to, say, Dormitory Authority bondholders? Why would it be a good idea to shred existing contracts and laws? But if you don't do that, then bankruptcy doesn't really deal with "state" debt. Read more: http://www.nypost.com/p/news/opinio...e_states_Y453OpE9bY5TJdYPZVSOcP#ixzz1BycMHPh1
Don't "Leftist Rags" always spew the Leftist view? America is in such dire strates, strong action is called for. Everything should be "on the table"... think "25% reduction in ALL SPENDING over the next 3 years"... somewhere around there is at least a temporary soltuion. Anything less is nothing but a political circle jerk.
One of the underlying tenets of the bond market, specifically revenue bonds like those from the MTA, is the "moral obligation" of the municipality, and ultimately, the state to backstop any shortfall. If that assurance didn't exist the ability to raise capital for these types of projects via the bond market would be quite a bit harder. So, ultimately, the state owes all of that $78.5BN of debt.
This is probably what separates a newspaper columnist from a trader, the point you made and it makes sense. So OTH "Under the legislation that has been signed by Quinn, underwriters must disclose their cumulative notional volume of the stateâs CDS positions and trades and their outstanding gross and net notional amount of Illinois CDS over the last three months" (Although one article is NY the other Illinois, states are scrambling for ideas) Putting two and two together, the NYpost article is listing why a state bk won't be of any value, then the same states are going to complain or somehow limit the CDS spread. Is this correct?
And that holds at the state level as well. This debt isn't one-off, it is a revolving ponzi system with new debt continually paying off old debt. If a state bankruptcy caused a large enough break in that chain, they'll have to go for a bailout anyway. If that's the case, why bother pissing off the pensioners (and, more importantly, the indirectly-subsidized health care industry)? Go straight to uncle ben and obama, they'll print enough for everyone. Come up some new acronyms, wag fingers and make some speeches, and in the end give the states "loans" to tide them over through another election cycle. Ireland, Greece, California, what's the difference.
IMHO, the CDS issue is a worry because Washington didn't do enough to curb speculative abuse after the 2008 meltdown. Maybe if enough hedge funds pile on this time and push Illinois or California to the brink of bond default they might actually do something, but I doubt it, there's too much money in the CDS game to actually fix it. The idea of having an insurance policy against bond default is fine but, allowing people to buy or write naked policies is akin to the mob taking out policies on people, shooting them and then collecting on it.
Sound good but, if that were actually the case things would have unraveled a long time ago. Unlike the federal government, states and municipalities can't print their own money to finance their operations. That's why most bond indentures have a requirement of an escrow or sinking fund so that the principle will be paid off when the bond matures.
Yes, they can. And hopefully, they will. The money isn't there. Boo-hoo. You don't get your beach house in Maui. You've been so hard done by... lol