It’s difficult to know who the phrase “pouring money down the drain” is more appropriate for, the County officials who took on the debt, or the bond holders? What’s fascinating is just how deep and dirty the municipal bond market in the USA has become over recent years. The process is simple, if an area needs, for example, large scale civil engineering work undertaken it ‘goes to the market’ to borrow and then socialises that cost onto its residents in the form of increased local taxes over a set period of time.
The fact that seventy percent of the lowest income residents reside in the areas where the sewer cost was applicable obviously escaped the decision makers attention. This year through to September, the number of municipal defaults fell to 42, totalling $949 million, from 79 in the first nine months of 2010, amounting to about $2.89 billion, according to the Distressed Debt Securities Newsletter. However, if Jefferson proves to be the canary in the sewage system for ‘Munis’ then the fear could be that other counties may inevitably follow.
Jefferson County, Alabama, declared the largest municipal bankruptcy in U.S. history yesterday. The move yesterday by Alabama’s most-populous county came after state lawmakers failed to back a September agreement with creditors led by JPMorgan Chase & Co. that would have reduced its sewer-system debt of more than $3 billion.
The Chapter 9 filing leaves creditors including JPMorgan facing hundreds of millions of dollars in losses and may revive concern that defaults may rise in the $2.9 trillion municipal bond market. The move leaves residents of the county that’s home to Birmingham, Alabama’s largest city, facing uncertainty over how much they may have to spend on sewage fees to repay the debt. The size of sewer-fee increases became a hurdle because many residents, particularly in Birmingham, can ill afford higher costs, almost 70 percent of sewer users reside in the two districts with the lowest average incomes.
The bankruptcy also may affect bond insurers Financial Guaranty Insurance Co. and Syncora Guarantee Inc., which guaranteed the sewer debt. Along with its sewer debt, Jefferson owes about $1 billion, including $201 million of general-obligation securities and school-construction bonds totalling $814 million, according to its bankruptcy petition. The county listed the top three unsecured creditors related to the its general-obligation debt as Bayerische Landesbank in Munich, a unit of JPMorgan and the Depository Trust Co., both based in New York.
Municipal bankruptcies are rare: Over a period of more than 60 years since 1937 there were fewer than 500, according U.S. court data. The filing eclipses the previous record, set in 1994 by Orange County, California. The suburban Los Angeles county was driven into bankruptcy by $1.7 billion in losses on interest-rate bets. It had about $2.2 billion in debt outstanding, according to a June 1995 financial report.
Responding to the noise from Germany and France late yesterday afternoon and early evening the European Commission President Jose Manuel Barroso has wasted no time in attempting a damage limitation exercise by issuing a warning of the dangers in splitting the Eurozone. EU sources told Reuters that French and German officials had held discussions on just such a move. Attempting to ‘herd’ the rest of the cats, as two have already escaped from the bag, may prove be an impossible task given the previously unified ‘on message’ narrative from the Merkozy alliance has been destroyed.
There cannot be peace and prosperity in the North or in the West of Europe, if there is no peace and prosperity in the South or in the East.
German Chancellor Angela Merkel stated yesterday evening that Europe’s plight was now so “unpleasant” that deep structural reforms were needed quickly, warning the rest of the world would not wait.
That will mean more Europe, not less Europe. It is time for a breakthrough to a new Europe. A community that says, regardless of what happens in the rest of the world, that it can never again change its ground rules, that community simply can’t survive.
She called for changes in EU treaties after French President Nicolas Sarkozy advocated a two-speed Europe in which euro zone countries accelerate and deepen integration while an expanding group outside the currency bloc stays more loosely connected – a signal that some members may have to quit the euro.
The European Central Bank, the only effective bulwark against market attacks, intervened to buy Italian bonds in large amounts but remained reluctant to go further and Italy’s 10-year bond yields shot above 7 percent, a level widely deemed unsustainable, as investor confidence evaporated.
The over used phrase “Greek tragedy” does not adequately describe the current farce enveloping Greece. Greece’s party leaders are scheduled to meet on Thursday morning to clinch a deal on a national unity government. On Wednesday, Prime Minister George Papandreou said he was handing over to a coalition that does not exist and then failed to install an old-style politician and personal ally as premier. Papandreou wished his successor well and headed off to meet the president only for it to emerge that there was no successor due to feuding in the political parties.
Italy will test investor demand today when it sells 5 billion euros of one-year bills today and then as much as 3 billion euros of five-year bonds on Nov. 14. The country is set to spend 77 billion euros this year in financing its debt and faces about 200 billion euros of bonds maturing in 2012. Italy’s Senate rushed to pass debt reduction measures that clear the way for establishing a new government that may be led by former European Union Competition Commissioner Mario Monti in a bid to restore confidence in Europe’s second biggest debtor. The government in August announced a 45 billion-euro package of austerity measures to balance the budget in 2013. The plan helped convince the ECB to purchase Italian debt. The ECB has spent more than 100 billion euros since beginning its purchases of Italian and Spanish bonds on Aug. 8, an effort that has failed to stem the rise in yields.
Markets (snapshot at 10am GMT (UK) time)
The euro has rebounded, European stocks have rallied after earlier losses and Italy’s bonds have rallied as the European Central Bank bought the country’s debt before today’s auction. U.S. index futures and oil have advanced. The yield on Italy’s 10-year bonds dropped 14 basis points at 9:24 a.m. GMT, the euro strengthened 0.2 percent to $1.3571 after falling as much as 0.4 percent. The Stoxx Europe 600 Index is up 1.5% percent after sinking by as much as 1.7 percent. Futures on the benchmark Standard & Poor’s 500 Index advanced 0.8 percent. The S&P GSCI index of 24 commodities climbed 0.4 percent, with oil in New York up 1 percent.
In the overnight/early morning session Asian/Pacific markets suffered due to Eurozone contagion fears. The Nikkei closed down 2.91%, the CSI closed down 1.89% whilst the Hang Seng suffered a massive 5.25% fall, it’s down circa 23% year on year. The ASX200 fell by 2.34% and the KOPSI (the Korean index) fell by 4.94%. European indices have recovered to be in positive territory, the STOXX index is up 1.5%, the UK FTSE is up 0.19%, the CAC is up 1.17% and the DAX is up 1.58%. The MIB is up 3.21%.
Economic calendar releases that may affect the sentiment of the afternoon session
13:30 US – Import Price Index October
13:30 US – Trade Balance September
13:30 US – Jobless Claims October 19
19:00 US – Budget Statement October
A Bloomberg survey shows a median expected change of 0.0% (month on month) for import prices compared with the previous released figure of 0.3%. The year on year figure predicted was 11.8% from 13.4% previously. Economists surveyed by Bloomberg yielded a median forecast of -$46.0 billion for the trade balance. The figure reported last month showed a figure of -$45.6 billion. A survey forecasts Initial Jobless Claims of 400K, compared with the previous figure released which was 397K. A similar survey predicts 3680K for continuing claims, compared with the previous figure of 3683K.