U.S. municipal bonds sales down 44% in 2011

13:28, March 23, 2011      

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U.S. municipal bonds sales were down 44 percent so far in 2011 from the same period last year, a senior municipal strategist of Citigroup Inc said on Tuesday.

The muni bond issuance declined sharply in the first months this year amid declining revenues and crush of pension obligations pushed the local governments' debt to surge, George Friedlander said at the Bloomberg State & Municipal Finance Conference in New York.

Muni bond salesmen went through nightmare since the beginning of 2011. The Wall Street analyst Meredith Whitney predicted "50 to 100" significant municipal bond defaults in 2011, totalling "hundreds of billions" of dollars, which scared the markets.

Speculation about a wave of defaults by cash-strapped local governments prompted investors to pull money from muni bond mutual funds for the past 15 weeks.

Friedlander said there were several reasons for the big decline.

First of all, some bonds that would have been sold during the first quarter of 2011 rushed to market before the expiration of the Build America Bond program on Dec. 31 2010, which was signed by President Barack Obama on Feb. 17, 2009 and offered 35 percent subsidy on interest rate costs to either issuers or bondholders.

Secondly, 30 new governors were elected, and many states have not yet started to plan the new projects. "Protracted budget battles" have delayed financing in the top six issuance states, namely California, New York, Texas, Illinois, Florida and Pennsylvania. A number of other states that might have entered the market are now in the midst of "even more heated debates" concerning the government/employee relationship.

And one other important reason was that some governments have a very limited capacity to pledge taxes or revenue to pay debt service right now.

According to the National League of Cities, municipalities face annual budget shortfalls of as much as 83 billion dollars by 2012. The Center on Budget and Policy Priorities reported that states have budget gaps totalling 140 billion for the 2012 fiscal year.

California, Illinois and New Jersey were named to the top three list, which faced the biggest bankruptcy risk.

Source: Xinhua
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