Sunday, March 2, 2008

Is your Town or County next?

The Muni debt crisis continues to unfold. The failure of the Muni Auction Rate market is forcing many local governments to pay the default rate on their bonds. These higher payments, many times more than double the standard interest rate, are putting municipalities under stress.

The most recent casualty is the $3.2 billion of sewer bonds in Jefferson County (Al) that were cut to junk status after the county said it will be unlikely be unable to pay banks holding its floating-rate debt. S&P slashed the county’s sewer bonds by six levels to B, five steps below investment grade. The county, which includes Birmingham, is struggling to find alternatives to survive the predicament.

Previous posts touched on the impending muni crisis (see Bankrupt Cities, Muni failures, and CDS stress, Auction Rate Stress Continues: Muni Bond Funds Impacted, More Credit Turmoil: The Muni Auction Rate market freezes) discussed the issues facing this market.

The obvious next question should be how this situation will impact your local government. Munis are being downgraded every day; governments are finding no buyers for new issues to refinance existing debt. Will your local services come to a grinding halt as municipalities scale back and scramble to overcome debt problems?