The Muni Bond Crisis Has Officially Begun: Harrisburg Skips $3.3 Million in Muni Payments

By Graham Summers   Sep 9 2010 3:43PM

Just last week a municipal bond Crisis began in earnest when the capital of Pennsylvania, Harrisburg, dropped $3.3 million worth of municipal bond payments for the month of September.

This is just the beginning. Collectively US states continue to face massive budget short-falls in spite of massive Federal Aid. According to the Center on Budget and Policy Priorities, US states are expected to run deficits of $144 billion and $119 billion in FYs 2011 and 2012 respectively, unless they can cut spending further or raise taxes dramatically to close these gaps.

States can cut spending and raise taxes all they like, but the stark reality is that most of them have debt problems. And a growing number will be forced to choose between social programs and debt payments to make ends meet. Social programs buy votes, debt payments buy credit ratings.

Which do you think politicians are going to sacrifice?

I believe we that Harrisburg, Pennsylvania’s actions represent the very tip of the iceberg municipal bond missed payments and/or defaults. Remember, the muni bond market is $2-3 trillion in size, so we’re not talking about a minor issue here.

Worst of all, individual investors are the ones most likely to end up getting creamed.
Indeed, ever since the 2008 Crash, investors have been generally pulling money from stocks and putting them into bond funds. All in all they’ve put $480 billion into bond funds since June 2008. Of this, some $88 billion or 18% has gone into municipal bond funds according to the Investment Company Institute.

These folks are in for a very rude surprise when they find out that munis, which historically have maintained extremely low default rates, are not nearly as risky as once thought.

I strongly urge you to review any muni bond holdings you might have in your portfolio. Below is a list of the states with the largest projected fiscal deficits for FY 12.

However, as the case of Harrisburg, Pennsylvania proves, the muni bond crisis is going to be a state, city, and town affair, so examine EVERY muni bond you own, regardless of where it is located.

If things continue to worsen in the bond market, investors are going to be looking for return OF capital, instead of return ON capital. And Gold offers one of the safest returns ON capital out there.

If you enjoyed this article and would like to read more of my insights, swing by www.gainspainscapital.com today.

Good Investing!

Graham Summers

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I call it The Financial Crisis “Round Two” Survival Kit. And its 17 pages contain a wealth of information about portfolio protection, which investments to own and how to take out Catastrophe Insurance on the stock market (this “insurance” paid out triple digit gains in the Autumn of 2008).