For now Greece isn’t the world’s top concern, and if the Euro bailout works, then Portugal and Spain have some breathing room, the Business Insider reports. The world’s next big worry should be a place, much more closer to the United States, California.
The Business Insider said that like Greece, California is afflicted with a lot of financial and social problems that have sent the state on a downward spiral. And in terms of the state’s core structural flaw, there is only one but big question: “Could Washington come together to bail the state out?”
However, some analysts don’t agree with this point of view. “It’s wacky,” said municipal debt analyst Jeffrey Cleveland at Payden & Rygel. “Just look at the ratio of debt to state gross domestic product. It’s 10 percent for California and somewhere between 104 percent and 150 percent for Greece.”
California’s economy, at $1.845 trillion, dwarfs Greece’s and on a stand-alone basis and would be the world’s eighth-largest. It’s the biggest borrower in the U.S. municipal market, which states and local governments use to fund roads, sewers and other infrastructure, according to the Reuters’ report.
Most muni debt comes with tax-free interest and is often bought by rich Americans looking for tax savings.
Munis, whose total returns have smartly outperformed U.S. Treasuries in the last half year, have also become increasingly attractive to foreign institutional investors since 2009’s roll-out of Build America Bonds and their fatter taxable yields.
Europe’s sovereign-debt tremors last week spread to U.S. taxable credit markets and were felt in the muni market’s BABs trading, according to Morgan Stanley Smith Barney Senior Fixed Income Strategist George Friedlander.
State governments in the United States, from tiny Rhode Island to huge California, do face daunting yearly budget crises and long-term pension and health care obligations that may require $1 trillion or more to fund over time.
They will not get quick relief via higher tax payments and lower social-services costs from the U.S. national economic recovery because tax revenue for local and state governments lags economic shifts by a year or more.
“If Rhode Islanders are not looking at Greece, they should be,” columnist Edward Achorn said on Tuesday on Rhode Island’s Providence Journal newspaper website. “Its financial meltdown offers a dispiriting object lesson of what could happen here unless we reverse some trends.”
But institutional investors, analysts, ratings agencies and finance officials say a Greek-style collapse of a state government in the United States is immensely remote, despite some parallels in exploding pension obligations and aging populations.
“California is not Greece,” said Tom Dresslar, a spokesman for California’s state treasurer. “Greece’s budget deficit in 2009 was 13.6 percent of its GDP. Our budget deficit, at $20 billion, was 1.1 percent of our GDP.” Debt service, such as interest payments among the 50 U.S. state governments, typically runs at just 3 percent of each state’s annual expenditures, according to the U.S. Bureau of Economic Analysis.
“California debt is different from Greek debt,” said Kenneth Naehu, a managing director at Bel Air Investment Advisors in Los Angeles. “Our debt service is so small a part of our budget that it is minuscule, and it gets a top priority. For California, restructuring debt is not possible, but for Greece it may be the best thing.” [via Reuters and Business Insider]