Outspoken analyst Meredith Whitney has elaborated on her controversial call on US municipal debt default.
Last year she predicted that ‘muni bonds’ – the debt issued by local governments – would be hit by “hundreds of billions of dollars worth of defaults”.
The claim drew criticism from high-profile investors who felt that she was exaggerating the problem. Recent improvements in the muni bond market also seem to undermine her argument, as investors showed faith that states will be able to cut costs and raise revenues.
But Whitney thinks this confidence is misplaced, as around a third of state costs are fixed and cannot be cut. “Expenses are near the highest they have ever been due to built-in annual cost escalators that have no correlation to revenue growth.”
She points out that “even as states have made deep cuts in some social programs, their fixed expenses of debt service and the actuarially recommended minimum pension and other retirement payments have skyrocketed”.
Whitney shot to fame in 2007 with a negative analysis of Citigroup’s loan book, which proved a harbinger of the credit crisis. TV appearances followed, before Whitney quit her job as an analyst at Oppenheimer and set up her own advisory firm.
With her soothsayer reputation coming under fire, she told the Wall Street Journal that, while things may appear calm on the surface, the defaults “are already happening” in the form of under-funded pensions and reduced public services.
Whitney warned that eventually it would be the turn of municipal bond holders, who will “experience their own form of contract renegotiation in the form of debt restructurings at the local level”.
Over time the individuals and businesses feeling the brunt of higher taxes “will migrate to more tax-friendly states”, creating further headaches for the states with the worst deficits.