About $100 billion of U.S. municipal bonds will default during the next five years, according to Nouriel Roubini’s consulting firm, less than the “hundreds of billions” predicted for 2011 by Meredith Whitney.
“State and local debt problems are not systemic in nature, and will not infect the financial system, though they will dampen economic recovery,” David Nowakowski, the credit-strategy director at Roubini Global Economics LLC in New York, and Prajakta Bhide, an analyst, said in a report this week.
Roubini, a New York University economist who in 2006 predicted the credit-market collapse, is co-founder and chairman of Roubini Global. His firm’s study is less dire for the $2.86 trillion municipal market than Whitney’s forecast.
The bank analyst and head of Meredith Whitney Advisory Group LLC in New York said in December that “hundreds of billions” of dollars of defaults could occur this year as state and local governments struggle with budget deficits and tax collections that haven’t returned to pre-recession levels.
Municipal defaults can be triggered by declines in reserves or other events including missed or late payments to investors. There were $2.8 billion of defaults last year, less than half the $7.4 billion in 2009, according to the Distressed Debt Securities Newsletter in Miami Lakes, Florida. The average for the last five years is $4.1 billion, according to data compiled by the newsletter’s publisher, Richard Lehmann.
The Roubini report said its $100 billion figure for the next five years, equal to $20 billion annually, was a “pessimistic calculation.” At that amount, investor losses would be only about $35 billion because of the historically high rate of principal repaid on distressed municipal bonds, it said.
The firm is the latest to cast doubt on Whitney’s forecast. Public officials, investors and rival analysts have said her view exaggerates the risk that the slow-growing economy poses to the municipal-bond market.
Defaults will be restricted to unrated issues and junk-rated revenue bonds, the firm said. That’s in line with market conditions, Matt Fabian, managing director at Concord, Massachusetts-based Municipal Market Advisors, said at a conference at Bloomberg headquarters in New York today.
“The defaults we’ve seen in the market have been high-yield, non-rated area, smaller transactions, not the big headlines,” he said.
Standard & Poor’s said in a report today that issuers of municipal bonds it ranked as investment grade avoided defaults last year even as they faced credit-ratings pressure from the effects of the U.S. recession.
Public finance “remains significantly stable in nature and of sound credit quality,” S&P wrote.
Boise County, Idaho, with a population of about 7,450, filed for bankruptcy today, the first U.S. municipality to seek Chapter 9 protection from creditors this year. Six municipal entities filed last year, most of them small utility or sewer districts.
“Ultimately, municipal bankruptcies will be at a lower level,” Bill Gross, who manages the world’s biggest bond fund at Pacific Investment Management Co., said on Bloomberg Television’s “In Business” program in January. “I don’t subscribe to the theory that there will be lots of them.”
Speculation about defaults prompted investors to pull money from municipal-bond mutual funds for the past 15 weeks. Spending cuts by state and local governments also contributed to a revision lower of U.S. gross domestic product growth in the fourth quarter.
The economy grew at a 2.8 percent annual pace in the period, down from a 3.2 percent initial estimate, as state and local expenditures fell at a 2.4 percent annual rate, the Commerce Department said Feb. 25.