YONKERS, NY — July 8, 2010 — Investors have suffered the risk of default in Portugal, Ireland, Greece, and Spain. The nations comprising the acronym known as PIGS may lead to local governments. Cities such as Yonkers whose fiscal legacy has been written in red ink for years finds itself among other U.S. regions in which the difficulties of curbing pensions and budget deficits are similar to some eurozone countries.
“The yield attached to some forms of infrastructure municipal bonds has risen relative to US Treasury bonds because of fears that cash-strapped local governments will struggle to repay these loans,” writes Nicole the London-based Financial Times.
“At present, absolute borrowing costs for regional governments remain relatively low in historical terms because of the Federal Reserve’s ultra-loose monetary policy, but any swings in municipal yields will be watched closely by investors since they suggest the fiscal anxieties about the eurozone could now infect the US,” continues the Financial Times.
The risk in the second half of the year is that investor attention is deflected from Europe to the US. Parts of California, towns and cities in Illinois, Michigan and New York State have been noted as the most vulnerable. Investor concern about the viability of those cities will lead to a further widening in the municipal bond market.
Shoulfd these market fluctuations come into play, they would push borrowing costs costs that would exacerbate the squeeze on local authority finances, such as in Yonkers, and place greater stress ofn the State and Federal budgets.
There is a perceived risk to munis. Local municipalities can default and some can file for bankruptcy, a threat uttered and divulged by Yonkers Mayor Phil Amicone on a recent News 12 Westchester. Even so, municipal market experts maintain that default fears are overblown.
Should a state come to the brink of bankruptcy, it is expected that they would likely gain federal support.
Observers have also begun to warn about long-term problems of under-funded pension systems that could lead local municipalities to use bankruptcy for relief from pensions obligations.