PIMCO Explains Why Meredith Whitney & Muni Haters Have Blown This Crisis Way Out Of Proportion

Business Insider ^ | 02/08/2011 | Gregory White

[SeekAndFind]

The muni market needed re-pricing, but now it has gotten way out of control, according to PIMCO's Christian Stracke and Joseph Narens.

The pair explain that what's happening right now in the muni market makes a certain amount of sense. It's a bit like last year, when the market repriced sovereign risk to act like a credit product, rather than an interest rate product it was previously valued at. That meant yields were higher and the cost to insure the debt rose too as a result of investors realizing that, yes, a sovereign could actually default.

Now that's happening with muni bonds, but it has gotten completely out of control and there's multiple reasons why.

* Median state debts are around 7.3% of gross state product; with local governments tacked on it is a bit above 18%. This is not comparable to sovereigns, but it shows it's not too big.

* The average maturity date of muni debt is 16.2 years, giving some time and delaying rollover risk for the broader market.

* Muni interest costs are actually costing states less, not more, compared to history.

* Small municipalities may face imminent cash flow problems, but this isn't likely to be a broad problem. Public pensions -- which may eventually be a serious issue -- are not yet ready to cause a significant threat.

[Errant]

[Frantzie]

PIMCO pimping for libs and Obama.

[ChildOfThe60s]

His points sound plausible at first reading. But...

There are some serious weaknesses in his reasoning. The most fundamental one being that even the more moderate steps he believes would fix things would require foresight, self discipline and a willingness to buck public employee unions. None of these qualities existed up to now and there is no good reason to believe local governments will have sudden epiphanies and get them.

Municipalities have the next 30 years to remedy any pension shortfalls

Yeah, and I believe in Santa and the Tooth Fairy. They aren't going to do squat until the cards are starting to fall.

He is also assuming that external factors, such as the federal government's solvency and the growth of the economy in general will be positive and improve in the near and long term. We don't have an historical precedent for the current insolvency of the federal government. Ditto for some of the states.

What is record high inflation (yes, it IS coming) going to do the municipalities' balance sheets? And the cost of borrowing? And the cost of servicing pensions and benefits?

Government economic philosophy: Next year we'll recommend forming a commission to do a study to recommend ways to deal with our budget procrastination.

[CPT Clay]

I happen to believe that Meredith Whitney is right.

[Alberta's Child]

For what it’s worth, I heard a radio interview with Steve Forbes last month and he pretty much agreed with the author of this article. He said the municipal bond market is in for some bumps, but he doesn’t foresee a catastrophe like some people are predicting. His advice was to be well-diversified so that problems with individual issues don’t have a major impact on your bond holdings.

[jdsteel]

I’m certainly not pro-0bama and I believe the hysteria over muni’s is overblown. The next 6 to 12 months may be good to muni’s.

[FromLori]

lol “Bill Gross is “the bond pimp” looking for a new batch of hoes!” found that comment regarding this.

http://www.pimco.com/Pages/NationalMunicipalBond.aspx

http://www.pimco.com/Pages/MuniMarketBargainsACloserLookatMunicipalDebtDeficitsandPensions.aspx

[apoliticalone]

So much of the risk depends upon the specific state and the municipality. Some were run with outrageously corrupt and reckless fiscal policy. They had bond authorities that issued bonds for worthless projects by connected cronies.

The only solution in the USA is a policy that requires sacrifice by all including the poor and also tax hikes for the rich.

[kiryandil]

Public pensions -- which may eventually be a serious issue -- are not yet ready to cause a significant threat.

PIMPCO is blowing hot air on this one.

I'd like to see an analysis of various municipal budgets with the pension data points laid out for all to see.

I could think of a simple spreadsheet format that would make a taxpayer's hair turn white if they saw it.

Oddly, the Rebecca of Sunnybrook Farm crooners haven't suggested anything along those lines.