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Credit Default Swap Spreads for US States: Bad, but Manageable (In Theory)

by Brett on June 20, 2010

I’ve been searching around for some charts of credit default swap spreads for US state governments (if anyone has a favorite source, please let me know).  In the process, I came across this Economist piece, which profiled the finances of the American “problem states.”

The case is made that the credit default swap spreads of the problematic state governments (California, Illinois, Michigan, and New York) are each not nearly as bad as that of Greece.

The parallels with Europe are unfair, though only up to a point. American state and local debt last year was $2.4 trillion, about 16% of gdp. But most of that debt is issued by local governments or state agencies and has specific assets or fees, such as road tolls, earmarked for paying it back. Even in the weakest states, debt that needs to be paid out of general tax revenue was under 5% of GDP last year. Greece’s was 115%. The numbers for deficits show an even greater contrast. California’s deficit, assuming the state fails to close it, would equal only 1% of its GDP, compared with 14% for Greece and 9% for Portugal last year.

It’s a fair point, but I think ultimately, it’ll prove to be a pointless point as well.  Spreads are consistently widening, and I don’t see anything that could potentially reverse, or even slow, this trend.  Tax receipts should continue to decline as long as the current depression continues (and make no mistake, this is a Depression, not a Recession).  Spending reform is politically unpalatable (something that is pointed out in the article).

So while state default could possibly take longer than some bears anticipate, you have to think it’s a matter of “when”, rather than “if”, at this point.


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