Risk of Widespread Municipal Bond Defaults Near `Zero,' Moody's Zandi Says

Dire warnings about impending defaults in the municipal-bond market are overblown, an economist and analyst told a group of the nation’s governors.

The risk of a major default or round of defaults is “close to zero,” Mark Zandi, chief economist for Moody’s Analytics Inc. in West Chester, Pennsylvania, said during a panel session at the National Governors Association’s winter meeting in Washington.

“I think that the very loud hand-wringing over the prospects for major municipal-bond defaults is entirely misplaced,” Zandi said.

Thomas Doe, founder and chief executive officer of Concord, Massachusetts-based Municipal Market Advisors, said he has seen nothing to change his view that general-obligation debt at both the state and local level is secure.

“I don’t want to be Pollyanna about it,” Doe told the governors. “I have great confidence in you all, the markets do have confidence in you as well, and the informed investor, the institutional investor, understands that your debt is good.”

Speculation about the possibility of widespread municipal- bond defaults intensified in recent months after Meredith Whitney, the banking analyst who attracted attention for correctly predicting Citigroup Inc.’s 2008 dividend cut, said last month that “hundreds of billions” of municipal bonds may default this year as a result of the financial strains. Her analysis drew criticism from investors and state officials such as California Treasurer Bill Lockyer who said Whitney’s analysis was flawed and her estimates too high.

Rolling in Cash

Zandi, speaking during a meeting of the National Governors Association’s Economic Development and Commerce Committee, said he’s optimistic about the prospects for economic growth during the next year after the worst economic slump since the Great Depression.

Zandi predicts that the nation will add about 1.25 million private-industry jobs during the next year, and he expects the U.S. unemployment rate of 9 percent in January to fall to about 8 percent by the end of 2012.

“Most industries are rolling in cash,” he said. “It’s really, in my mind, no longer a question of, ‘Can businesses invest and hire more aggressively?’ It’s really a question of their willingness, and that’s a very important distinction.”

Zandi said that “the coast is not clear” because of 4 million first mortgage loans in foreclosure nationwide and rising energy prices. He also said that despite his forecast for job growth, he expects about 250,000 state and local government employees will be fired during the next year.

$175 Billion

States are seeking to close budget deficits that may total $175 billion during the next two years, Washington Governor Christine Gregoire, the Democrat who heads the National Governors Association, said yesterday.

Zandi’s comments prompted Indiana Governor Mitch Daniels to say that the foreclosures and oil prices “are of a dimension that’s liable to keep things frozen as unfortunately they have been in terms of business investment and expansion.”

“I’m going to try to cheer you up, governor,” Zandi replied. He said energy prices are unpredictable but an encouraging sign is that 30-day, 60-day and 90-day delinquencies on first-home mortgages are falling nationwide.

“A year from now, the fiscal situation will look measurably better,” Zandi said.

The association’s annual meeting, which began yesterday, concludes tomorrow after the governors meet at the White House with President Barack Obama and members of his cabinet.

To contact the reporters on this story: Mark Niquette in New York at mniquette@bloomberg.net; William Selway in Washington at wselway@bloomberg.net

To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net

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