State And Local Governments Still Feeling The Sting From Downfall Of Bond Insurance Market
Many state and local governments are still having a rough time in municipal bond markets. The fall of the bond insurance sector coupled with falling tax revenues leaves many in a precarious position.
It’s all well and good to talk about rating municipalities on the same standard as their corporate counterparts but the fact of the matter is, for many of them, the current recession has left their finances in shambles. Budget shortfalls and the scarcity of credit overall has many municipalities and other non-profit organizations paying much higher interest rates for the debt offerings than when the financial crisis began.
The short term municipal bond market has been especially hit hard, the auction rate securities market virtually collapsed overnight last year when a number of bond insurers lost their top credit ratings. Those with variable rate bonds saw interest rates jump in some cases by more than 10% and had to scramble to quickly find alternative financing options.
The banking system which had supported the market when buyers couldn’t be found by purchasing the debt, pretty much left the market entirely due to their own difficulties, which required massive federal bailouts. Unfortunately their has been little federal support given to the situation state and local governments are in.
There has also been little support given to bond insurers for that matter, though municipalities would be loathe to trust them once again, they did play a pivotal role for decades in lowering the overall cost for debt in the municipal bond market. Whether that symbiotic relationship remains beyond repair remains to be seen.
