This year, the fear is that entire governments may go under.
The anxieties about "sovereign debt" have been most acute in Europe, where some countries--Portugal, Ireland, Italy, Greece and Spain--have huge debt burdens. Greece, in particular, is in dire need of assistance as it owes four hundred billion dollars.
And now, people are wondering if American state and city governments are headed for their own Greek tragedy. Last week, The Wall Street Journal asked, "Who Will Default First: Greece or California?"
While American states are typically required to balance their budgets annually, that hasn't stopped them from amassing a pile of long-term debt by issuing municipal bonds. And, like Greece and other countries & some banks, states have used accounting techniques to under-report the amount they owe, even while accumulating huge, unfunded liabilities like pension obligations.
State governments from New Jersey to California that are struggling to close budget deficits are skipping or deferring payments to already underfunded public employee pension plans. The moves could help ease today's budget pressures, but will make tomorrow's worse.
Just like a default by Greece would have nasty ripple effects across the global economies, a state-government default would have all sorts of unpleasant consequences, as state bonds have traditionally been considered a thoroughly safe investment. Concern over a potential liquidity shortage at Greece's private-sector banks fueled a sharp selloff in Greek debt and equity markets Thursday. More alarmingly, investors drove the interest rate of the Greek two-year bond to 7.45% Thursday, 6.64 percentage points more than what Germany pays. This example illustrates that the market is the dog wagging its central bank tail, not the other way around.
In the past, much of the assistance that states get from Washington is close to automatic: in normal times (which these are not now), the government sends almost half a trillion dollars in aid directly to the states. Last year's stimulus sent more than a hundred and fifty billion dollars to state and local governments. But the question today is: Can the federal government be counted on to step up its efforts in this year of critical state and municipal budget failures?
Source: THE NEW YORKER, April 12, 2010
Understanding the Fed -- Not Just the Myths About the Fed
If you would like to understand more about how the U.S. Federal Reserve works, you can spend time on its website -- or you can get the real story. Elliott Wave International has collected eight of Robert Prechter's most trenchant articles about what the Fed actually does. He takes on the misleading myths about the Fed and explains what's really going on as he writes about these topics. Read more.
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