States’ financial troubles do not pose a systemic risk to the municipal bond market and total issuance should be about the same in 2010 as last year, according to economists surveyed by the Regional Bond Dealers Association for its first semiannual economic forecast. However, they warned that states’ steep spending cuts pose a significant negative threat to the national economy.
The RBDA partnered with Moody’s Economy.com to conduct the survey in mid-February, officials with the dealer group said during a press conference yesterday.
The association polled 13 economists at its member firms for their 2010 national and regional economic outlooks. Mark Vitner, senior economist at Wells Fargo Securities LLC, analyzed the survey’s results.
The credit crisis in Greece has led market participants to “chatter” about a similar scenario in a U.S. state, Vitner told reporters. However, he said the comparison does not add up because states cannot go bankrupt.
“I don’t think there is a systemic risk from states,” he said. “It is hard for a state to have a systemic risk.”
Vinter said the greater threat to the municipal market lies with sector-specific issuers, such as airports or hospitals, that could default this year.
States “have to balance the budgets,” he said. “It might take longer, it might be comical at times, but they will balance their budgets.”
Respondents to the survey overwhelmingly indicated that issuers’ budget troubles will not mean less debt issuance.
Ninety-one percent of respondents said municipal bond issuance will hold steady or increase modestly compared to the 2009 total.
What is “somewhat surprising” is that “we have not seen state and local financial troubles get in the way of debt issuance,” Vitner said.
But budget troubles will have a negative impact on the national economic recovery as state and local governments furlough workers, raise taxes and cut spending, according to the economists surveyed.
The budget cuts come “at a significant economic cost,” Vitner said.
The federal government will need to provide more assistance to state governments than is planned in the current fiscal 2011 budget, especially for states whose budgets have been hit hardest, the economists said.
The state budget problems “are bigger than first thought” and “in the very near term, are beyond states’ capabilities to solve by themselves,” Vitner said.
The economists said Virginia, Maryland and Delaware, which have triple-A ratings, will benefit the most from federal spending, based on their proximity to Washington. Texas and North Dakota also were cited for their financial strength. Conversely, California, New York, Arizona, Florida and Illinois have the most difficult budget situations, the economists said.
In the macro economy, the high unemployment rate poses the most serious negative risk to the economic recovery, according to the survey respondents. Access to credit also is a challenge going forward, they said.
The median forecast expects 2.7% gross domestic product growth in 2010 and unemployment remaining above 9% through the third quarter of 2011.
Inflation concerns were “noticeably absent” among respondents, Vitner said. The median consumer price index will increase 1.8% in 2010, according to the median estimate.
About half of the economists said the Federal Reserve will not begin to tighten monetary policy until next year. They expect the 10-year Treasury note will yield 4.0% by the third quarter of this year.