Sunday, April 14, 2013

So Where's the Warning Label?

In the past and on another blog I have written about bond market vigilantes. It's not as if there exists a group of men with six guns and nooses that hunt down deadbeat corporations and municipalities but they are real. Simply by refusing to buy the debt of financially shaky private or public institution bond traders hold tremendous power. Seldom do they ever refuse to buy a doubtful issue but rather they make the issuing authority pay up for the risk they are taking in purchasing the bond and rightfully so. Bond funds, which buy the bulk of municipal paper, have a responsibility to their investors not the cash strapped city governments of California and Illinois.
In the pending bankruptcy the city of Stockton is asking the debt holders to take less than the amount it pledged it "full faith and credit" to repay. The reason Stockton is broke is because it cannot possibly pay the pensions it promised its employees. Debt service accounts for only about 7% of the city's budget yet that is the area Stockton wants to cut. Should the bankruptcy court agree to this arrangement expect borrowing costs for all California cities to jump dramatically as the so called vigilantes come to life.
Coyote blog writes:
In light of the recent Stockton bankruptcy, this should carry a warning label: "California reserves the right to repudiate up to 100% of these bonds whenever payment of the interest or principle interferes with paying state employees the maximum possible pension benefits. These bonds are subordinated to any promises made at any time by any politician to state employees unions, past, present, or future."

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