January 1, 2013

THIS WILL JUST MAKE IT HARDER FOR CITIES TO BORROW MONEY, THOUGH, WHICH OVERALL IS A GOOD THING. Stockton Tries To Pull A Chrysler. “The municipal bankruptcy unfolding in Stockton, California is giving investors a bad case of deja vu. Just as the Obama Administration bailed out the United Auto Workers in Chrysler’s bankruptcy while hanging bondholders out to dry, the city of Stockton is subordinating its bond debt to worker pensions. But what’s really scary is that the Stockton case could be replayed in dozens of California cities. . . . Ratings agencies downplay the ‘systemic risk’ that the Stocktons of the United States pose to the $3.7 trillion municipal bond market. But then they also said mortgage-backed securities were Triple-A. While the market may not be in danger of blowing up soon, bondholders face a very real danger of being blown off to preserve worker pensions.”

Even the possibility that this might happen will make it harder for cities to borrow. But probably not as hard as it should be.