Fears that municipal bonds could spark a renewed financial crisis have been growing as the gargantuan size of many US states’ budget deficits has begun to weigh on the market.

by James Phillipps at citywire

EXCERPTS:

California has a budget deficit of $19 billion, while Illinois is $15 billion in the red. This is despite both states instigating a range of cost-cutting measures. The Fed can only legally buy muni debt with a maturity of up to six months and even then only paper directly backed by tax. This makes up less than 3% of the market. The Fed is also blocked from lending to insolvent borrowers.

California has a budget deficit of $19 billion, while Illinois is $15 billion in the red. This is despite both states instigating a range of cost-cutting measures.

‘The shockwaves would go beyond the state’s boundaries. It would be like allowing a bank to fail,’ he says.

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