States Are Getting Fed Up With Bond Insurance
The trouble with the bond insurance industry has raised the cost for issuing debt for many local and state governments. Municipal bond yields have been climbing recently as bonds backed by troubled insurers face the lingering threat of a ratings downgrade.
What was once a stable and profitable niche in the financial sector, the bond insurance industry has been hit hard by the sub prime collapse. With defaults expected to continue in the foreseeable future, the decision to insure mortgage backed debt has left them exposed to losses many analysts fear they will be unable to meet.
Many states are now railing against the double standards for credit ratings between corporate and municipal debt that force them to purchase bond insurance or pay higher interest rates even though historically they have a much lower default rate. The nation’s largest issuer of municipal debt, California, has decided to stop purchasing bond insurance all together and is considering forming their own bond insurer backed by the state’s pension fund.
A coalition of state treasurers have started putting pressure on ratings agencies to use a single scale system. If that were to happen, every state except for Louisiana whose economy was devastated by Hurricane Katrina would most likely receive a “AAA” rating and obviate the need for bond insurance.
