Canadian Investment Review

Greek Revival in the U.S. (Beware Municipals)

Written by Caroline Cakebread on Wednesday, February 24th, 2010 at 11:30 am

greek-ruins-6-2A couple of pundits have warned recently about a Greek-style fiscal crisis coming to the U.S. Given all the finger-pointing going on in the Eurozone, it’s a sober reminder that there will be few winners as this financial crisis unfolds. And things could get a lot worse.

First, Niall Ferguson’s piece in the Financial Times where he writes:

“For the world’s biggest economy, the US, the day of reckoning still seems reassuringly remote. The worse things get in the eurozone, the more the US dollar rallies as nervous investors park their cash in the “safe haven” of American government debt. This effect may persist for some months, just as the dollar and Treasuries rallied in the depths of the banking panic in late 2008. Yet even a casual look at the fiscal position of the federal government (not to mention the states) makes a nonsense of the phrase “safe haven”. US government debt is a safe haven the way Pearl Harbor was a safe haven in 1941.”

More recently, Graham Summers writing for the Web site, Seeking Alpha, blogged about the reckoning that is spreading through the once air-tight U.S. municipal bond market:

The city of Vallejo, CA declared bankruptcy back in May 2008. Now we see Harrisburg, Pennsylvania passing a 2010 budget which doesn’t include debt payments (as in payments on Muni bonds and other debts the city owes) which is essentially a default. We’re only just getting started here. I’ve said several times that bonds, not stocks, would be the big story of 2010. That includes muni bonds which are a $3 trillion market. With tax revenues falling and major debt issues to consider we are going to be seeing a heck of a lot more defaults and bankruptcies coming from local, city, and state governments.

Niall Ferguson can be found here: Niall Ferguson

Graham Summers can be read here: Graham Summers

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