When the relief program was first conceived of last year, pleas by municipalities for a slice of the money went unheeded by Treasury officials who had earmarked the funds solely for troubled banks and financial institutions. But, in recent days, new conversations have taken place involving Federal Reserve and Treasury officials and state and local representatives that have given rise to cautious optimism.
“The municipal sector has been asking for federal assistance since TARP was just a glimmer in Hank Paulson’s eye,” said Matt Fabian, managing director at Municipal Market Advisors, an independent research firm. “But no one was pursuing it for months. Now, there has been a re-engagement in Washington about using the TARP money.”
Andrew Williams, a Treasury spokesman said, “We’ve had conversations with people from California and with people from around the country about the challenges facing the municipal market. And we continue to study the issue closely.”
In a speech last week at the National Press Club, Treasury Secretary Timothy F. Geithner said that the Treasury is “looking at ways to make sure these markets are working so that states and munis can meet their needs.”
But, according to a Bloomberg News account of the speech, Mr. Geithner cautioned: “I wouldn’t use the word bailout.”
With bailout fatigue setting in, it is unclear how successful the municipalities will be. At a Congressional hearing last Thursday called by Mr. Frank, federal officials remained cool to the idea of tapping into the relief fund, while still expressing concern over a credit squeeze facing many municipal borrowers.
David W. Wilcox, a deputy director at the Federal Reserve, said at the hearing that the Fed is “quite concerned” over any proposal that would extend federal guarantees to municipal debt. But, he allowed that if Congress does take that course, it should “tailor any government intervention in the municipal bond market relatively narrowly” and provide for a quick government exit when market conditions improve.
On the same day, Mr. Geithner told a House Appropriations subcommittee that the relief money cannot be used to resolve local government budget crises, since that money has been reserved for financial companies.
He said, however, that the Treasury would work with Congress to help states like California, which have been struggling to arrange backing for municipal bonds and short-term debt. Mr. Geithner did not provide any specifics.
Clearly, market conditions are not favorable in several corners of the municipal bond market, which consists of more than 50,000 public entities that have issued about $2.7 trillion in debt.
In April, Moody’s Investors Service issued its first-ever blanket report on municipalities and assigned a negative outlook on the creditworthiness of all local governments in the United States. This suggests that Moody’s may downgrade the ratings of many municipal issuers, which would increase their borrowing costs.