Fears about massive defaults in the municipal bond market are “well overblown,” James Reynolds, chairman and CEO of Loop Capital in Chicago, told CNBC Tuesday.
“I can’t imagine a scenario where we see a major state default,” said Reynolds, whose company is the nation’s largest minority-owned financial firm.
“The municipal bond market is $2.5 trillion marketplace,” he added. “I think when folks are looking at the liabilities and obligations of states, they’re acting as if these liabilities come due tomorrow or next week. These liabilities are very long-term in nature.”
State governments aren’t like corporations, said Reynolds, because they have lots of resources, including taxing authority. As for troubled states, such as Illinois and California, Reynolds predicted that officials will have the political will to turn the situation around.
The cost of borrowing funds for projects isn’t an issue either, maintained Reynolds. “The debt service of a state budget is generally at 10 percent, usually in the 4 to 7 percent range is what they’re paying for debt service, so it’s not a big part of their budget.”