Buffet Predicts More Municipalities Will Declare Bankruptcy As Stigma Subsides

Tuesday, July 17, 2012 07:36
Buffet Predicts More Municipalities Will Declare Bankruptcy As Stigma Subsides

Warren Buffet has predicted the number of municipal bankruptcies will rise, but not to the levels predicted by Meredith Whitney. The fact that three California municipalities declared bankruptcy within three weeks of each other indicates municipalities are no longer held back by the stigma bankruptcy can carry with it.

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Cities have been crunched by lower tax revenues and rising healthcare costs for pension beneficiaries. Buffet says that cities will use potential bankruptcy as a negotiating tool with employees in revamping pension contracts.
Buffet testified in front of the US Financial Crisis Inquiry Committee in 2010 and predicted dire times for municipalities. There have been 42 municipal bankruptcies in 2012 so far. This compares to 68 to this point in 2011 and 83 to this point in 2010.
Municipal bond yields are more attractive than Treasuries and investors weary of low interest rates have been flocking to tax-free bonds, thinking that municipal backing is sound.
Ten-year benchmark municipals yielded 1.7% July 17—the lowest yield in a little over two months. The bankruptcies indicate that the lingering effects of the financial crisis of 2008 are still being felt. Cities have tried to cut expenses but, with slow economic growth, many have been unable to do so sufficiently to return to solvency.

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