Debt Default Still Coming Soon

Anthony Pignataro:

This morning a colleague of mine handed me a copy of an article dating back to Dec. 16, 2009, saying that Bill Watkins, the director of Cal Lutheran’s Center for Economic Research and Forecasting, was saying California’s state budget was so problematic that it’s “more likely to default than not.”

That was 10 months ago, and the state hasn’t defaulted on any debt payments. Wondering if perhaps Watkins had changed his mind, I gave him a call.

“Nothing has fundamentally happened in the past year to make me change my mind,” he said. “The likelihood of a federal bailout has probably gone up. The recent budget deal is more of the same smoke and mirrors — perfectly consistent with what they’ve done for years.”

So when would default happen?

“I’m not sure what default looks like, to tell you the truth,” Watkins said. “States can’t go bankrupt, we recognize that. But I think we just get squeezed and squeezed and then someday there’s just not any money there. There will be increased interest rate pressure — we already have pretty high interest rates.”

I mentioned how Standard & Poor’s and Moody’s have given A- ratings — which are pretty terrible — to California bonds.

“That reflects the state’s cash flow,” he said. “We have a structural deficit that year after year we’re not able to address. And there’s California’s increasing lack of competition with other states. Markets see California as not a place where businesses can prosper and expand.”

But there’s good news: “Illinois is in at least as bad as shape as we are,” Watkins said.

See! Illinios is doomed too. I feel better already.

OCT. 22, 2010

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