State and local debt not uniformly troubled: analysts

WASHINGTON (Reuters) - More than 1,000 analysts of government finances joined ranks on Thursday with investors and issuers against attacks on the credit-worthiness of the $2.8 trillion U.S. municipal bond market.

“There is no doubt that many issuers of municipal bonds are facing budget and funding challenges that are unprecedented in the postwar era, but we caution against treating the universe of state and local debt obligations as uniformly troubled or treating the municipal market as a homogenous sector,” the National Federation of Municipal Analysts said in a statement.

The group represents more than 1,000 analysts and occasionally comments on the municipal finance industry.

State and local governments were fiscally wounded by the longest and deepest economic recession since the Great Depression, and their revenues remain lower than before the downturn.

For the last three years, they have had to cut spending or hike taxes in order to balance their budgets. On top of that, the extraordinary help they received from the federal government’s $814 billion stimulus plan is ending.

This has prompted fears that they will default on their debt and that local governments will declare bankruptcy. States cannot declare bankruptcy.

Over the last three months, the municipal bond market has had three major sell-offs that have pushed up interest rates on tax-free bonds. Individual buyers have been exiting the market in large numbers over concerns about fiscal crises.

On Wednesday, mayors met in Washington and sought to reassure the public and investors that they will do everything to avoid bankruptcy. Los Angeles Mayor Antonio Villaraigosa said: “There is no scenario where we would ever consider the ‘B’ situation.”

The analysts said the municipal bond market is “made up of many different sectors, each of which has different credit drivers.”

“Even for those issuers who have serious financial problems, it is difficult to predict that any given issuer will or will not default,” they said. “This is especially so given the political and legislative hurdles presented when an issuer considers default.”

Recently, Wall Street analyst Meredith Whitney, who correctly predicted that the housing crisis would hobble undercapitalized banks, warned that 50 to 100 municipal bond issuers representing “hundreds of billions” of dollars of debt could default or restructure their finances.

Alexandra Lebenthal a champion of municipal bonds, recently told Reuters that historic muni default rates are minimal and issuers’ revenues and budget woes are improving.

The NFMA echoed those points. It said default risks for general government debt that is repaid by taxes and revenue bonds is different from those issued for water and sewer systems, which generate their own revenues for debt repayment.

additional reporting by Joseph A. Giannone in New York and Michael Connor in Miami; Editing by Diane Craft