http://www.globalresearch.ca/index.php?context=va&aid=8295

Crisis spreads to US municipal debt market

The ongoing financial market crisis whose background I have detailed in the series, The Financial Tsunami, Part I-V, was nominally triggered by a crisis of confidence in the value of the most risky securities, sub-prime home mortgages in the US, mortgages often made by banks without checking the borrowers credit history or income. Because the securitization revolution was premised on the flawed illusion that by spreading risk throughout the global financial system, risk would disappear, once the weakest part began to collapse, confidence in the multi-trillion entire edifice of securitized debt began to collapse. The process unravels over time which is why most have the illusion of a localized crisis. In reality, centered in the US economic and financial sector, what is now underway is a crisis not even comparable to the 1930’s Great Depression.

Now the normally high-quality debt of US local and state governments, so-called municipal debt, is getting hit. California, New York City and the owner of the World Trade Center site will replace their floating rate debt, sharply raising costs for local governments as the economic depression is slashing their tax revenues.

In February, interest rate yields on US tax-exempt municipal debt rose to the highest ever relative to Treasuries. The market is reacting to deteriorating finances at bond insurance companies and credit rating companies. States, cities and agencies are pulling out of the $330 billion floating rate or auction-rate market, where costs have doubled since January and plan to sell about $22.5 billion of fixed-rate, tax-exempt bonds to raise capital at a significant penalty price.

Bond fund managers in New York and London tell us they have never seen such troubles in the municipal bond market before.

The market for floating rate or auction-rate municipal bonds in the US, once thought safe, entered crisis as losses tied to sub-prime mortgage bonds and related securities threatened so-called monoline bond insurers' AAA ratings, causing investors to avoid the bonds they had insured. The same monoline insurers, specialized New York financial security insurance companies, had insured sub-prime mortgage securities and municipal debt. The monoline companies guarantee about half the $2.6 trillion of outstanding state and local government debt, some $1.2 trillion. Higher interest rate costs for states and local governments will aggravate local US fiscal crises as the depression spreads, creating a self-reinforcing downward spiral. The process is in its early stages yet.................