The GEAB,
Global Europe, report just issued a warning on U.S. muni bonds:
The US municipal bond market («
Munis ») which supplies the finance for the local infrastructure for transport, health, education, sewage, is on the edge of imploding as a consequence of the growing inability of US local authorities to handle their indebtedness. It is originally a very « subprime » (or very « Greek ») case, because information on the actual financial health of US local authorities is largely defective and the credit rating agencies have rated these bonds in a completely arbitrary fashion, therefore well adapted to all the disappointments possible for those who own them"
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Continues the report:
"The crisis is indeed in the course of ruining a number of these authorities who don’t have the means to raise taxes much (when they simply can despite the opposition of their fellow citizens). The end of Federal stimulus and exhaustion of financing facilities [...] presages a very dangerous second half of 2010 for this particular financial market as a consequence of the relapse of the US economy (so, a worsening fiscal shortfall), the new international trend towards budgetary austerity and the fear of public over- indebtedness. For LEAP/E2020, there is no doubt that we will soon see the monoline insurers like Ambac which specializes in « Munis », in the financial media headlines again. Since November 2007, our team has been one of the first internationally (
GEAB N°19 ) to flag Ambac’s, MBIA’s, and other monoline insurers’ upcoming problems which were also first in line over the « subprime crisis » (2). One can count on them being first in line at the next crisis of « Munis ». The size of this particular financial market implies that such a crisis would be as destructive at international level as the « subprime » one. That said, an insurer warned being worth two, as the proverb says, one must take note that the proportion of insured US municipal bonds has gone from an average of 60% for the last fifteen years to 8.5% in 2009, which speaks volumes on the state of the insurers and probably too on the degree of risk of the « Munis » themselves (3). In short, get awau from US municipal bond markets… and expect a new financial explosion particularly devastating for the US. It will drag along itself a large part of US banks and pension funds into the debacle."
