Default Troubles for State Governments?
You probably know that many local and state governments are in a big financial mess right now. California is not the only state experiencing financial problems. While California cut its budget this year, can it do it again next year and the year thereafter if things stay bad?
That’s just the dilemma for California. Now think of this problem running across the country.
Our banking editors found a great list of the states in possible financial difficulties, so here it is … The 11 States most likely to default and need a government bailout. The statistics are from CMA Datavision:
Pennsylvannia:
Cumulative Probability of Default (CPD): 10.7%
CDS Mid 10 Year (in bps): 126.8 Implied Credit Rating: aa-
Florida:
Cumulative Probability of Default (CPD): 10.8%
CDS Mid 10 Year (in bps): 130.0 Implied Credit Rating: aa-
Ohio:
Cumulative Probability of Default (CPD): 11.2%
CDS Mid 10 Year (in bps): 134.0 Implied Credit Rating: a+
Massachusetts:
Cumulative Probability of Default (CPD): 11.2%
CDS Mid 10 Year (in bps): 134.5 Implied Credit Rating: a+
Rhode Island:
Cumulative Probability of Default (CPD): 12.4%
CDS Mid 10 Year (in bps): 148.5 Implied Credit Rating: bb+
New York:
Cumulative Probability of Default (CPD): 15.9%
CDS Mid 10 Year (in bps): 194.0 Implied Credit Rating: bb+
Nevada:
Cumulative Probability of Default (CPD): 16.7%
CDS Mid 10 Year (in bps): 205.0 Implied Credit Rating: bb+
New Jersey:
Cumulative Probability of Default (CPD): 17.1%
CDS Mid 10 Year (in bps): 210.0 Implied Credit Rating: bb+
Michigan:
Cumulative Probability of Default (CPD): 18.8%
CDS Mid 10 Year (in bps): 237.0 Implied Credit Rating: bb
California:
Cumulative Probability of Default (CPD): 20.9%
CDS Mid 10 Year (in bps): 260.0 Implied Credit Rating: bb-
Illinois:
Cumulative Probability of Default (CPD): 21.0%
CDS Mid 10 Year (in bps): 260.0 Implied Credit Rating: bb-
The statistics you should know are the following. While every state, except Vermont, is required to balance its budget each year, this forces states to align their revenues and expenditures on a frequent basis.
A typical state’s realized deficit is usually less than 2% of GSP (gross state product). The average debt service of any state is usually around 5% of the annual budget.
About 50% of newly issued municipal bonds used to be insured and were typically AAA grade. However, less than 10% of new bonds coming to market are now insured. Before you buy municipal bonds, investigate carefully.
