By Fester:
I have been writing about the decline of the monoline bond insurers for a while because their failure will have significant impact on the local community that I live in. The City of Pittsburgh is effectively broke despite running a decent size surplus for this year as there are significant structural and systemic finance problems in the near run pipeline for the city's budget. Most revenue sources are either frozen in size and scope or they are mandated to be reduced such as the parking taxes. At the same time, pension obligations and debt refinancings will need to be done. Pittsburgh is not the only local government in trouble, just the largest and most visible. Most of Allegheny County is flirting with the danger zone and has been for a signficant while. Decreased access to credit for major regional projects such as revamping the sewer system or systemically higher costs will be a major shock to most local budgets. The Angry Drunk Bureaucrat notes the particular dynamic that is feared:
the City of Pittsburgh needs to continue to issue debt in the future in order to do... you know... *stuff*.
There are roads to fix, buildings to knock down, streetlights to hang, and so forth, all of which are paid for by taxes, yes, but, and this is the nuanced bit, paid on the municipal credit card with its bondholders and over the long run.
Now, this is fine, usually, but with a continuing pension obligation, nervous markets, and rumors of a return to deficits within a few years (despite this year's surplus), you have to wonder what the City's capacity for long term borrowing will really be in a few years... or if it'll have to either (a) find new revenue streams or (b) push these expenses off of its books to... well... somewhere.
But this isn't necessarily a financing discussion; it could just as easily be a foreshadowing of further reductions in City services... which may lead to a further decline in population... which reduces the tax base... which means the City can borrow less... which further reduces City services...
Well another domino has fallen. Bloomberg is reporting that Moody's has taken another monoline insurer, CIFG out back, and put it out of its misery:
CIFG Guaranty, the bond insurer that lost its AAA ratings in March, was downgraded to below investment grade by Moody's Investors Service, which said the company may become insolvent.
The ratings were cut seven levels to Ba2, two steps below investment grade, from A1 to reflect ``the high likelihood that, absent material developments, the firm will fail minimum regulatory capital requirements,'' Moody's said in a statement....
CIFG is the second bond insurer to confront the draining of all its claims-paying resources. ACA Capital Holdings Inc., a Maryland-regulated bond insurer, has entered into a series of forbearance agreements to prevent it from having to post collateral on $60 billion of credit-default swap contracts.
ACA is rated CCC by S&P, eight levels below investment grade.
XL Financial Assurance, the bond insurer owned by Security Capital Assurance Ltd., was cut to a below investment grade rating of BB by Fitch in March. The insurer is rated A- by S&P and A3 by Moody's.
CIFG's business model was to rent its superior credit rating and thus access to cheap money to borrowers with mediocre credit ratings and then bank on the arbitage of its premium payments and the expected default risk. Pittsburgh frequently used bond insurers to save money on its debt. However CIFG now has a credit rating that is significantly below Pittsburgh's mediocre but investment grade rating. So buh-bye business model.
At the same time as the monoline insurers continue to blow up, local municipalities will be facing higher costs and less access to debt capital all else being equal. However all else is not equal as local governments are also facing significant revenue dips and a multi-generation deferred infrastructure maitenance bill coming due in either cash or decreased services. Pretty nasty bag for all concerned.
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