Will Ballooning State Budgets Be the Next Systemic Financial Crisis?

October 5, 2010

In recent history, the United States has survived at least three major financial debacles: the Savings & Loan crisis around 1990, the bursting of Internet bubble around 2000 and the collapse of the real estate bubble that began in 2007.  What's next? asks the Washington Examiner.

Meredith Whitney, the financial analyst who first warned how the real estate crash would create a disaster for U.S. banks, now warns of a looming sovereign debt crisis -- but the sovereigns she refers to are not Greece, Ireland or Portugal.  They are California, New Jersey, Illinois and Ohio.

In an interview with CNBC, Whitney said she sees scary parallels between the fiscal condition of states/municipalities and the banks, including widespread off balance-sheet borrowing and a lack of transparency.

Whitney rates the condition of the nation's largest 15 states (as measured by gross domestic product) on four criteria: economy, fiscal health, housing and taxes.

  • Only two states -- Texas and Virginia -- get positive ratings.
  • The middling states are Washington, North Carolina, Pennsylvania, Maryland and Massachusetts.
  • California, New Jersey, Illinois, Ohio, Michigan, Georgia, New York and Florida bring up the rear.

There is a giant gap between the states' spending and tax revenues, which she estimates at $192 billion, or 27 percent of their budgets, for fiscal 2010.  That pressure will continue building, especially for municipalities that rely upon property tax revenues, as real estate market continues to implode, says the Examiner.

Whitney expects the states to look after their own finances first, leaving many cities to fend for themselves.  Accordingly, she expects municipalities could start defaulting on bonds in large numbers.

Source: James A. Bacon, Jr., "Will Ballooning State Budgets Be the Next Systemic Financial Crisis?" Washington Examiner, September 30, 2010.

 

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