In terms of raw debt, the recent bankruptcy of Jefferson County, Alabama was the equivalent of one of the smallest euro zone members such as Malta defaulting on its obligations.
As reported in a Wall Street Journal article by Kelly Nolan, "The bankruptcy filing of Jefferson County, Ala., has caused alarm bells to ring in the municipal bond market." As detailed in her piece, "Muni Market Sounds Alert," municipal bonds issued by Jefferson County have been trading almost 25% below the issue price.
Jefferson County is hardly alone. As reported in a recent Time magazine article, major US cities such as San Diego and San Jose are looking at bankruptcy in the future if financial conditions do not improve due, primarily, to soaring pension obligations and declining tax revenues. Should San Diego or San Jose file for bankruptcy, that would once again be the equivalent of a Malta default. From even a vast state such as California, that would be similar to a default from a mid-tier euro zone nation like Austria or perhaps Belgium.
If there are a series of municipal bond defaults in the United States, as predicted months ago by legendary financial analyst Meredith Whitney, who was the first to alert investors to the abject fiscal condition of Citigroup before the onslaught of the credit crash, a tremendous strain will be put on the US Treasury. Much of the stimulus package from 2009 went to subsidize state and local budgets, adding greatly to the American national debt.
If Washington has to step in to rescue more state and local jurisdictions, it will be impossible to cut federal spending. Already, 40 cents of every dollar appropriated by Congress is borrowed. Moody's just warned the United States that it has two years to achieve significant budget reductions or a debt downgrade would be forthcoming. As the euro zone is demonstrating, it starts small -- with the smallest and most vulnerable economies -- and does not end for a long, long time.
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