S&P Muni Expert Takes on Meredith Whitney


Meredith Whitney predicts that we'll see 50 to 100 municipalities debt defaults next year. Experts within the industry are saying they can not reconcile her numbers with the situation they see on the ground. Some go as far as to say that her prediction does not make sense. First of all, when it comes to the number, my sources tell me that her numbers needs to be defined — are those muni's unrated? Rated? There is a big difference between the two and the spread of defaults is huge: 39 defaults that were rated vs. 1,400 unrated. Investors need to remember not all munis are the same in the 2.8 trillion market. I decided to sit down with Robin Prunty, Team Leader for State Ratings for S&P whose team recently did an extensive report on the health of the muni market.

LL: Should investors be panicking about muni's?

RP: In our view, there are significant challenges out there but we do not see wide spread defaults in the universe we rate. There is almost 90,000 government entitles in the United States and many of them have authorization or capacity to issue debt. It's a tremendous universe out there. Yes Harrisburg is in fiscal distress and there are many other governments that are in fiscal distress and even some state level issuers but that does not mean they are not paying their debt.

LL: Your recent report goes into great detail of why you do not think the muni market will see a wave of defaults. Why?

RP: 99 Percent of the muni's we rate are investment grade. We feel based on current criteria our outlooks and where our credit outlooks are we are comfortable with the sector. That's not to say there have been downgrades that has occurred steadily in the last year and a half. We would expect there would be a continued level of credit downgrade activates and that there will be some credit deterioration but we don't expect that to translate that into widespread defaults.

LL: Not all munis are created equal correct?

RP: Correct, you see a lot of general obligation credits, essential service type of bonds that have a specific revenue pledge dedicated.

LL: How would you characterize the health of the muni market?

RP: I can only speak to the credit equation of the muni market. It is a very difficult budget climate. The duration of this recession is long by historical standards, and the longer the duration, the tougher the choices are. Governments are very used to managing through economic cycles. States in particular have a more volatile revenue stream than local governments generally. They have a very long history of managing through economic cycles. They have made a lot of changes to their budget structure based on lessons learned in prior recessions including formalize reserve levels. So it is difficult from a budgetary standpoint and on the pension and other post employment benefit side. Government has a history of weak funded ratios and they have made different reforms over time and you are starting to see some movement there.

LL: So is this more of a policy crisis versus a debt crisis?

RP: We don't see this as a debt crisis and the primary reason for that is most state and local governments issue amortizing debt — which means they pay principal and interest each year. They are typically not issuing debt with balloon or bullet maturities like we are seeing in other parts of the globe and they also don't as a first line of defense in a budget deficit situation turn to debt obligation to manage that. They are required to balance a budget and we all know there are different definitions to what "balance" means — some states will rely on debt-like mechanisms to be part of the solution of budget balance but it won't be the primary solution.

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A Senior Talent Producer at CNBC, and author of "Thriving in the New Economy:Lessons from Today's Top Business Minds."