Meredith's Prophecy: Gradually, Not All at Once
Where has Meredith Whitney been? She made a bold appearance on ‘60 Minutes’ in December of 2010 predicting there would be 50 to 100 large municipal and state defaults in the next year (2011). It didn’t happen and Meredith has rarely been heard from since. However, the oft quoted Hemingway line comes to mind, something to the effect bankruptcy comes two ways, “gradually, then all at once.”
Dean Myerow points on in Seeking Alpha, where Ms. Whitney erred. “She underestimated the glacial pace that these events take place at. She misunderstood the leeway that a local government or state is allowed based solely on past performance and presumed credibility. Most importantly she misunderstood the lengths that elected officials will go to, to avoid a problem.”
Today, the Wall Street Journal reports, the city of Hartford, Connecticut is in such bad shape, it's primarily bond insurer, Assured Guaranty, Ltd. “had offered to help the city postpone payments on as much as $300 million in outstanding debt, in a move designed to help prevent a bankruptcy filing for Connecticut’s capital.”
Similar to what lenders did after the ‘08 real estate crash, Assured is offering to “extend and pretend.” Heather Gillers writes,
Under Assured Guaranty’s proposal, debt payments due in the next 15 years would instead be spread out over the next 30 years without bankruptcy or default. The city would issue new longer-dated bonds and use the proceeds to make the near-term debt payments.
Connecticut lawmakers can’t decide on a budget and are running a $50 million a year deficit, until, next year when, “The city’s debt payments are scheduled to jump from $6.6 million to $56 million in the next four years.”
Hartford’s debt is rated near the bottom of the junk heap, and in edition to hiring Chapter 9 counsel, city government has engaged restructuring experts, which makes it tougher to refinance. “Once you hire restructuring advisers, investors steer clear,” said Matt Fabian, partner at Municipal Market Analytics, a municipal bond research firm.
Hartford’s debt is not the lowest rated debt in the muni universe. Two cities with lower rated debt are, Stockton, California and Atlantic City, New Jersey.
Mr. Myerow points out, “Much of the land in Hartford is occupied by untaxable government entities, which restricts the amount of tax revenue that the city can generate.”
Hartford is just the latest city to cry uncle. Harrisburg, PA filed BK in 2011, Jefferson County, Alabama filed soon afterward. Then came two big ones, Detroit, then Puerto Rico filed.
“Now states are not legally allowed to file bankruptcy as Central Falls and Detroit were,” writes Myerow, “and thus no state has ever done so. Remember, though, Puerto Rico was not legally allowed to either, and Congress granted them that ability without hardly blinking an eye.”
Hartford will likely not receive help from the state of Connecticut, because it, along with Illinois and New Jersey are “creeping towards insolvency.”
With its high taxes, Connecticut is losing businesses and wealthy individuals in droves. Last year, General Electric announced they were leaving the state and Aetna, said it was leaving the state as well. “With a shrinking tax base and already sky high taxes, the state is left with few options, and there is much doubt that the state will be able to generate revenue to cover it's over $5 billion deficit,” Myerow explains.
So maybe Meredith wasn’t wrong, just early.