Saturday, July 17, 2010

Will the Federal Government bail out Illinois?

The state of Illinois — broke, overleveraged, is borrowing to payoff its unfunded pension system, with
... something called “Build America Bonds,” a financial instrument created by Obama’s stimulus bill, to fund what amounts to a social-services program under the guise of a “capital project.” 

When the bonds were issued, they came it at a relatively low risk premium (given the precarious state of Illinois finances).  Does this signal that the Obama administration is going to stand behind the bonds in the event that Illinois defaults, even though the law says they are not supposed to?  Apparently, the bond market thinks so.
My own suspicion is that, even though the law explicitly says otherwise, there is some suspicion on the part of investors that the Obama administration would, in a crunch, stand behind those Build Americas — especially from a big state like California or from a politically sensitive state like the president’s home turf of Illinois.

No comments:

Post a Comment