Muni Bond Melt Down??

On 60 minutes they had an interview with one of the best Bank analyst, Meredith Whitney, who is broadening her research coverage – she's now calling for 50-100 significant municipal bond defaults in 2011, totaling "hundreds of billions" of dollars. While this is a troubling thought, I thought this article (HERE) posed the right questions – is Meredith over reaching.

I agree with the line of questioning the reporter follows:  1. While she is an excellent Bank analyst, how good of a Municipal bond analysts is she? That is a complex market, just like the Banking industry is difficult to grasp. 2. Another expert, Fitch Ratings, said in a special report – "It's more sparks than fire" - The tax- supported debt of an average state is equal to just 3% – 4% of personal income, and local debt roughly 3% – 5 % of property value. Debt service is generally less than 10% of a state or local government's budget, and in many cases much less…debt service is a relatively small part of most budgets, so not paying it does not do much to solve fiscal problems (particularly as compared to the costs of such an action).

In other words, if paying the bond interest is <10% of your budget; then find other things to cut. Why? Because if you default on the bonds – you'll never get financing again to build a school, roads, parks, hospitals, etc.

It's good that Meredith has done some detailed research on Municipal bonds defaulting, that kind of work needs to be done. Also, it's good for us to question the results as well. Like most things, take what you hear / read with a grain of salt (and do a little more research on your own). You can’t predict the future, but you can PLAN for it. Are you on Track??