The US 2014-2015: the dominoes of pensions, Munis and the Dollar

… The dilemma between sacrificing schools and retirees and allowing cities to go bankrupt is quickly resolved, because the first domino which can cause the rest to fall is municipal bankruptcy. What must be avoided at all cost is this huge danger of a “real” major « chapter 9 » municipal bankruptcy, with debt restructuring and bond repayment default. The impact would be devastating on the huge Muni (municipal bond) market, amounting to $3.7 trillion, because the seizing up of this market would prevent many cities from accessing finance. Interest rates on these bonds would rise instantly, resulting in a vicious circle: rising funding costs for cities already suffering from budget problems, serial bankruptcies, inability to pay pensions and provide public services; moreover, the price of already issued bonds would fall, which here again would be a disaster for “prudent” investors (such as pension funds) which could also go bankrupt. The wheel has turned full circle: if one chooses not to sacrifice retirees, then cities go bankrupt, taking pension funds with them, and still sacrificing retirees…
Excerpt GEAB N°86 (June 15, 2014)