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Let the Municipal Disaster Begin

California seemed to be in the spotlight for the longest time as the infamous issuer of I.O.U’s, but our next rival comes from the Land of Lincoln, Gangsters, and Political Corruption – Illinois.

Illinois Trumps California and New York for Default Risk

At a spread of 314 bps, Illinois is trading at a very similar default rate to Portugal at 319 bps.  Somehow this headline has been overlooked.  As reported by Bloomberg:

Legislators in Illinois passed a provisional $25.9 billion fiscal 2011 spending plan that’s about $13 billion short, and are resisting Governor Pat Quinn’s proposed $3.7 billion debt sale to make a pension payment and help close the gap. Lawmakers recessed last month without providing a way to cover the pension obligation and pay $4.5 billion in other bills.

What causes the dysfunction in state budgets is not the size of the deficits, but the dysfunction of the politics.  The politicians are less concerned with widening credit spreads and increased costs of funding and much more concerned with what the political fallout would be from cutting education expenses or state retirement benefits.  Get out the popcorn, because this might be an interesting entitlement show.

Posted in Economics, Markets, Media, Politics.

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