The following is a cross-post from Perry Mehrling’s new blog The Money View. Mehrling is a Columbia University economist and his blog is part of a broader effort to re-think macroeconomics and finance sponsored by the Institute for New Economic Thinking.
CDS Deja Vu: Speculation, stabilizing or destabilizing?
“Muni veterans are from Mars, Meredith Whitney is from Venus,” so says Lex, commenting on the wide divergence in current views about the future of the US municipal bond market. Whitney sees a coming wave of defaults; veterans see municipal debt/income ratios far below those that sovereign states routinely bear.
Lex frames the divergence as a matter of political judgment. Municipalities have made promises to bond investors, but they have also made promises to public sector unions in the form of wage and pension contracts. When the numbers do not add up, which promises will wind up being honored and which breached?
From a money view perspective, an alternative frame presents itself, namely the possibility of refinance. Quite apart from the possibility of public refinance, already we hear isolated stories of private refinance, which involve purchase of distressed municipal debt as a way of gaining control over the underlying assets, perhaps a hotel, or a stadium, or an airport.