Two and a half years ago, Meredith Whitney famously predicted a mass of “hundreds of billions of dollars worth of defaults” in the muni market. And last week, on the heels of the biggest default is US history, Whitney painted another grim picture of the muni space, saying that “as jarring as the reality may be to accept, Detroit’s decision last week to declare bankruptcy should not be regarded as a one-off in the US municipal market”.
In Michigan alone, there are five other cities that mirror Detroit’s problems. And there are troubled municipalities throughout the country: Chicago and Philadelphia have come under the glare of the spotlight since Detroit’s filing.
According to Whitney, “the aftershocks of the largest municipal bankruptcy in US history will be staggering, and Detroit will set important precedents”. One possible precedent is the treatment of general obligation bonds, which are backed by a municipalities taxing power, and for that reason are viewed by investors as almost risk free. Detroit’s Emergency Manager wants to treat the city’s general obligation bonds as unsecured debt; if that request is approved, it would send shudders through the market.
Investors are letting their feet do the talking: last week $1.2 billion was pulled from muni bond funds…that marks the ninth straight week of outflows.
Rezny Wealth Management may hold investments in above-mentioned securities; positions can change at any time.