Yesterday I
pointed out that the real estate market is going to take a huge hit from Katrina.
Today, the news is that the
Municipal Bond market is also going to get slammed hard.
Billions of dollars in municipal bonds helped build New Orleans and the surrounding areas hit by Hurricane Katrina. Now, the municipal bond market is warily watching to see whether this natural disaster could turn into a municipal finance one as well.
Four large municipal bond insurers disclosed yesterday that they had a combined exposure of $14 billion. MBIA, Ambac and the Financial Guaranty Insurance Corporation had $4 billion each, while the Financial Services Authority had exposure of $2 billion.
The insurers step in if the municipalities cannot make payments on their outstanding debt because of a loss of revenue - whether because of empty hotels or homes that may have to be razed.
"All the major sources of revenue collections will be under deep stress," said Richard Larkin, an analyst at J. B. Hanauer, the bond brokerage firm in Parsippany, N.J. "The city is dependent on sales taxes and on property taxes. And that is depending on some retail activity taking place - and it isn't."
Standard & Poor's, a rating agency that assesses municipal creditworthiness, has put municipal debt from Louisiana and Mississippi on its credit watch list
"This is not meant to predict a downgrade, but it is to focus on the uncertainty," said Alex Fraser, an analyst with Standard & Poor's. [...]
Mr. Alex Fraser is living in a dream world.
New Orleans is flat on its back and neck deep in sewage. There is no way on God's Green Earth that they will be able to meet their debt payments. I wouldn't give 10 cents on the dollar for those bonds. The same goes for Biloxi and many of those coastal towns.
And it gets worse. With $48 Billion in mortages underwater (see my previous post linked above), plus all those jobs that have vanished, we are looking at
MASSIVE bankruptcies and defaults. The bond market is about to take a
huge hit and it doesn't seem to have noticed.