Monday, January 24, 2011

Municipals at a Short-term Trading Bottom? PMX Eyed ..

WASHINGTON (Dow Jones)--House Majority Leader Rep. Eric Cantor (R., Va.) said he doesn't support allowing states to seek bankruptcy protection and categorically ruled out any future federal bailouts of state governments.

Cantor said states already possess the tools necessary to balance their budgets, saying there was no case for federal involvement in the fiscal problems most states are facing.

"There will not be a federal bailout of the states," Cantor said at a Monday press conference.

Cantor is the latest Washington official to take a dim view of any further fiscal aid to state governments.

On Jan. 7, Federal Reserve Chairman Ben Bernanke ruled out a central bank bailout of state and local governments strapped with big municipal debt burdens, saying the Fed had limited legal authority to help and little will to use that authority.

Cantor, the number two Republican in the U.S. House of Representatives said states already have the ability to deal with the fiscal challenges they face. He said that could include re-entering negotiations with public-sector unions over collective bargaining agreements.

Former House Speaker Newt Gingrich said last week he believed legislation would be introduced in the coming months seeking to create a bankruptcy-type mechanism for state governments.

But the idea has yet to yield a public sponsor and has little support from senior policymakers. While legislation could be introduced, without Cantor's support the effort would have very little chance of moving forward in the House.

During the two years the Democrats controlled both chambers of Congress and the White House, they steered roughly $165 billion to state governments in fiscal aid.

Many states came to rely on the federal money to help them balance their budgets, as they are required to do by law.

With Republicans taking control of the House, that spigot has been turned off, raising the possibility states could have to consider other measures to deal with their long-term obligations.

The idea of legislation to allow states to seek bankruptcy, floated last week, riled state governments.

On Monday, Connecticut Gov. Dannel P. Malloy dismissed the plan as "crazy talk," a spokeswoman said. California State Treasurer Bill Lockyer also blasted the proposal, saying it was politically motivated.

"It's a cynical proposal intended to incite a panicked response to a phony crisis," Lockyer said during a conference call with reporters. "The truth is that no state wants to declare bankruptcy, no state needs to declare bankruptcy and no state would" because "it would severely injure a state's economy."

States typically finance infrastructure projects through the issuance of municipal securities, which are backed by a state's ability to tax its citizens.

Allowing states to declare bankruptcy was seen by some people as a way for Congress to allow states to get out of longer-term obligations, such as funding pension benefits.

"I think it's a way to attack public-sector employees because they don't like their politics," Lockyer said.

Municipal bond prices have seen little effect from the reports of the proposal.

Gary Pollack, head of fixed-income trading and research at Deutsche Bank Private Wealth Management, said there was little negative reaction by the markets when the bankruptcy idea was initially floated last week.

"It was just another negative headline in the [municipal bond] space. There's been a lot of dislocation in the [municipal bond] market," Pollack said.

He said that, in fact, there was some accelerated buying of municipal bonds towards the end of last week because the sector had been "beaten up" when compared to prices for Treasury bonds.

The market had very little expectation there would be a significant increase in defaults on municipal bonds, Pollack said.

"The majority of municipalities are going to be fine. For the most part they are cutting costs, reducing expenses and balancing their budgets," he said.

-By Corey Boles and Siobhan Hughes, Dow Jones Newswires; 202-862-6601;

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(END) Dow Jones Newswires
January 24, 2011 16:56 ET (21:56 GMT)
Copyright (c) 2011 Dow Jones & Company, Inc.- - 04 56 PM EST 01-24-11

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