Mounting Debts by States Stoke Fears of Crisis

Mounting Debts by States Stoke Fears of Crisis By Michael Cooper and Mary Williams Walsh The New York Times
“Their fear is that even when the economy recovers, the shortfalls will not disappear, because many state and local governments have so much debt – several trillion dollars’ worth, with much of it off the books and largely hidden from view – that it could overwhelm them in the next few years…But the finances of some state and local governments are so distressed that some analysts say they are reminded of the run-up to the subprime mortgage meltdown or of the debt crisis hitting nations in Europe…So some states are essentially borrowing to pay their operating costs, adding new debts that are not always clearly disclosed…So far, investors have bought states’ bonds eagerly, on the widespread understanding that states and cities almost never default. But in recent weeks the demand has diminished sharply. Last month, mutual funds that invest in municipal bonds reported a big sell-off – a bigger one-week sell-off, in fact, than they had when the financial markets melted down in 2008. And hedge funds are already seeking out ways to place bets against the debts of some states, with the help of their investment banks.”