State, muni crunch "more personal" than credit slump - Whitney

Wed Nov 9, 2011 4:01pm EST

Related Topics

* State, muni crunch to hit social services, home values

* "Golden triangle" heartland states less hit by housing

* End of federal stimulus creates "cliff effect"

* "Right to work" states can fix problems sooner

By Deborah Zabarenko, Environment Correspondent

ATLANTA, Nov 9 (Reuters) - U.S. state and municipal funding problems will have a more personal impact on Americans' lives than the credit crisis and will reduce the value of their homes, Wall Street analyst Meredith Whitney forecast on Wednesday.

Whitney, who famously predicted the U.S. banking crisis in 2007, also offered insight on possible infrastructure investment in a "golden triangle" of the American heartland that was less affected by the U.S. housing crisis.

Examining data from U.S. states over the last three years, Whitney said she found "these dark pools of information ... that reminded me very much of what the financial industry looked like right before the credit crisis."

"Now that the states are under duress, the easiest thing for them to do is cut aid to municipalities ... cutting services, considering privatizing, cutting hours for parks and libraries. This is where it gets personal ... if you have lower social services, the value of your home is less," she told participants in the American Water Summit, which attracts those from water-related global and U.S. concerns.

"This situation ... will be so much more personal than the credit crisis," she added.

Whitney made her reputation by correctly predicting in 2007 that Citigroup would need a massive capital infusion. Last year, she said hundreds of billions of dollars of U.S. municipal bonds would default. She has stood by that statement even though this gloomy prospect has not yet come to pass.

Noting that the most debt-ridden areas tended to be along the two U.S. coasts, she described a "golden triangle" of communities spread across the American heartland in a triangle with points starting at Utah in the west, North Dakota in the north and Texas to the south. These areas, she said, didn't experience much of a housing boom and therefore avoided a housing bust and were less leveraged than coastal areas.

She said states have depended more on federal funding in 2011 than in any other year, but also said this was the year when federal stimulus funds expired for many states, creating what she called a "cliff effect" -- a sudden drop in resources for states and municipalities.

State spending cannot continue at current levels, which means some states will sell off assets, cut services and privatize some functions, such as prisons and roads, according to Whitney: "You haven't seen anything yet in terms of selling (state and municipal) assets."

However, some states will have no choice but to invest in critical infrastructure, she said, and this is where the potential for investment is greatest.

She said the United States invests 80 percent less in infrastructure than Europe does in public-private partnerships. Declines in infrastructure and services depress the value of U.S. homes, which are many Americans' single biggest asset.

Many of the states in the "golden triangle," she said, are "right-to-work" states, and many of them are also predominantly Republican states politically.

Whitney said the contrast between states with obligations to unions and so-called "right-to-work" states would be a key issue in pinpointing investment opportunities. "These (right-to-work states) are the states that can solve their problems sooner," she said.

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